Bear Mountain Bull

It’s time again for a little BMB R&R, especially with the market behaving as bizarrely as it’s been. Maybe if we stop watching it start to behave a little better…

Posting will be very light and variable over the course of this week, but we’ll put up an open thread each market day for our readers to comment on the day’s market activity or to post any interesting links they might run across.

Check the space below for whatever the latest might be during this ‘off’ time, and please visit the various sites in the ‘Links’ and ‘Regular Stops’ for up-to-date market news and analysis.

BMB will be back in full swing by next weekend.

Well, it started out bad today and got a little worse. Pretty much a broad-based pullback on average volume, with the major indices all finishing down at least 1%. The industry breakdown shows red far and wide - the worst damage was done in the airlines (again - this time down more than 4%), biotechs (-3.5%, hurting the Nasdaq), and housing (-2.7%). Also suffering was the health care sector, with drugs down 2.7% and healthcare products falling 2.5%.

The good news was that most of the stocks that have been leading the market up to this point did not suffer greatly. Having said that, many of those stocks have run straight up in the past few weeks, and could probably stand a bit of a rest.

The September jobs data will be released tomorrow morning, and earnings will begin to flow in the next few weeks - Alcoa reported after the bell today, and GE’s release will also be tomorrow morning.

Of course, we can’t ignore oil, which after pushing up to $53 during the day, has settled back to $52.50 in electronic trading.

With the S&P Retail Index ($RLX) pushing to new highs and the Retail HOLDRS (RTH) testing its April and June peaks, we are seeing reports that retail sales growth has slowed.

The S&P SmallCap 600 Index ($SML) has begun hitting new highs over the past few days, while another popular small-cap index, the Russell 2000 ($RUT) has not. Why the disconnect?

From StreetAuthority.com on the Russell 2000:

The Russell 2000 Index contains the smallest 2000 stocks (based on market cap) held by the Russell 3000 (The Russell 3000 Index is comprised of the 3000 largest and most liquid stocks based and traded in the U.S.). The Russell 2000 Index is more evenly weighted than most, as the top 10 holdings represent less than 2% of the index’s overall value. The average firm carries a market cap of just under $1 billion, and most stocks within the index range in size from roughly $100 million to $2 billion.

From the same site on the S&P 600:

Unlike the larger Russell 2000, which also tracks small-cap stocks, the S&P 600 has more stringent requirements for inclusion. Standard & Poor’s adds new stocks to the index based not only on size, but also on financial viability, liquidity, adequate float size, and other trading requirements. This ensures that the index is comprised of higher-quality firms than its larger counterpart

Later, on the ‘positives’ of the S&P 600:

Though not as widely followed as the Russell 2000, the S&P SmallCap 600 Index arguably contains a mixture of more stable and profitable firms. As a result, the S&P 600 has outperformed the Russell 2000 by an average of 3% per year throughout the past decade.

While BMB doesn’t necessarily believe that the purpose or intent of a stock index should be to “outperform” another, the fact that the two indices both track small-cap performance but do not track one another does provide the investor with more options. Since ETFs have been constructed to track both indices, one can choose to invest in the better performing index at any point in time.

If you’re interested in ETFs that track the S&P 600 Small Cap Index, take a look at IJR, or its Growth and Value brothers, IJT and IJS. The Russell 2000 is represented by IWM, and it too has Growth and Value offshoots in IWO and IWN.