Wednesday, November 21, 2007

Small caps are having a tough time

Sentiment seems to have changed from the seesaw pattern of the last 90 days to almost complete pessimism. The Russell is down over 6% YTD and short selling seems to be accelerating. Investors are selling their small caps and moving into large cap multi-nationals [ Pepsi, P & G, J & J, etc. ]. Until we get another sentiment shift, the smaller companies are not the place to be. If you want to see the short selling acceleration, go to the NASDAQ site and find the monthly short positions on any small cap you own. There won’t be many that haven’t been heavily sold.

As I’ve mentioned before, I have moved a significant amount of my capital to shorter term bonds and puts, with the remainder in large multi-nationals with the exception of the US Concrete, which started as a hedge, and Jones Lang LaSalle. Luckily for me the market sunk fast before I could accumulate much JLL. I’m currently waiting for a lower entry point, but still like the company.

The short interest in RMIX has actually decreased quite a bit! That along with the recent CFO stock purchase may indicate that this company’s price slide is near an end.

I’m staying with both of these small companies.

I’ve thought that we’d get an early December rally before the tax selling begins mid month. What could be the catalyst amidst all of the current pessimism? My guess is announcements of a couple of M & A deals of American companies and dollar flush foreign acquirers. That is apt to be followed by tough talk by Secretary Paulsen on a stronger dollar. Both activities could foster a large rally before recession thoughts re-emerge. So, I think the market will give investors another chance to reduce positions at higher prices, or short or buy puts for the New Year.

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