Birinyi Says SmallCap Rout Won’t Derail Market: Chart of the Day

For investors concerned that the selloff in small-cap stocks is a sign the overall market will collapse, Laszlo Birinyi has some advice: it isn’t.

“A lot of people are looking for negative stories to bolster their bearish arguments,” Birinyi, president of Birinyi Associates Inc. in Westport, Connecticut, said in an Aug. 4 phone interview. “I would not sell stocks based on the fact that small stocks are doing poorly.”

Small-cap stocks are trailing the Standard & Poor’s 500 Index by the most in 14 years. As the CHART OF THE DAY shows, the Russell 2000 fell 5.3 percent in the five months since February versus a 3.8 percent gain in the measure of the biggest U.S. stocks.

Shares of smaller companies are declining because investors are selling to collect profits from the 226 percent surge in the Russell 2000 since March 2009, Birinyi said in an Aug. 4 report. The five biggest companies in the S&P 500 have a bigger total market value than the entire Russell 2000, data compiled by Bloomberg show, evidence to Birinyi that the index is not significant enough to be a guide for the broader equity market.

Not everyone shares that view. If the Russell 2000 drops below 1,100, losses in the S&P 500 will probably accelerate, according to JC O’Hara, the New York-based chief market technician at FBN Securities Inc. The index slid 0.5 percent to 1,119.76 yesterday.

“Traditional textbooks will tell you small-caps should lead the market,” O’Hara said in a Aug. 5 phone interview. “If there is continued weakness in the Russell 2000 and nobody steps up to the plate, that could be pretty darn bad for the S&P 500.”

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