We're going to get back to our roots today and do something we just never seem to get enough time to do. What's that? Talk about small cap stocks. Yeah, we mention them on a pretty regular basis, but we rarely get to dive in deep with an analysis of the small cap market. So, we made a point of making time today. We think you're going to like what we've got for you, 'cause I'm pretty sure you're not going to get this kind of analysis anywhere else. We've also got some thoughts on the broad market, of course, but we'll save those for last. Let's get rolling with today's small cap reality check. Fine Turning Your Small Cap Stock Picks Just as a quick preface, we know what you're about to read isn't the kind of stuff you get at most other investing-oriented outlets. Most everywhere else, the focus is on talking about individual stocks making big news that particular day, and then making a buy/sell decision about that particular stocks based on the latest information. I'm telling you though, that bottom-up approach isn't the best way to pick stocks. The most fruitful way to find great stock picks is from the top-down, because from that direction you find trading ideas that aren't in the news and already crowded trades. With that as the backdrop, what we've got for you today is a look at the earnings growth trend for all the S&P 600's (small cap) sectors, and each sector's valuation. We're even going to take a look at a handful of the S&P 600 sector charts, as I think a couple of them are about to bloom. Shall we just start at the beginning? Great. Our first table is earnings growth rates - by sector - for the S&P 600's stocks going back several quarters (including Q3 of this year), and the outlook for the coming year. I'll let you know now you can ignore the figures for telecom and energy stocks. Their dance between profitability and unprofitability has skewed the math there. The highlighted areas are just figures I was impressed by. Even though most of them are only projected growth areas, in the case of staples, financial, and technology, the growth track has already been established. What really blows me away is how much better these growth outlooks are than the ones we see for their large cap sector brethren. Truthfully, I doubt we'll see as much success as the earnings estimates suggest is on the way, but even half of the growth outlook would still be a worthy pace of growth. This is why we love small caps. The flipside, of course, is the premium you tend to pay for this kind of growth opportunity. To that end, here's a look at the trailing and projected P/E levels for the S&P 600's ten key sectors. I'll warn you now these are bigger numbers than you may be used to seeing, but that's the trade-off. Once again the consumer staples and financial sectors impress me, though when it comes to valuation, I'm not as thrilled with healthcare and technology (although I'm willing to give some small cap tech stocks a free pass when it comes to valuation). The industrials also caught my attention in terms of value, and the industrials weren't too shabby when it came to earnings growth either. So what am I saying? I'll just come out and say it - if you're looking to fill a hole in the small cap segment of your portfolio, I'd start the search with discretionary stocks, industrials, financials, and technology stocks that are also S&P 600 (or Russell 2000) constituents. Everything else I could take or leave. We're not done culling all the small cap sectors we need to weed out just yet, however. What do the charts of these four remaining small cap sectors look like? The consumer discretionary sliver of the S&P 600 has a heap of momentum behind it, which has actually become a technical breakout. That's good from a long-term perspective, though I think a near-term pullback is in the cards. I'd hold off on any new buys here until we see a small step back. The S&P 600 Industrial Index is probably my favorite among the four areas left in focus today, just because it's NOT overbought and IS acting like it's on the verge of another bullish leg. I can see a move above the ceiling at 750 serving as a catapult. The financials are a close second when it comes to being my favorite group within the S&P 600 right now. I know on the surface it looks like the breakout from late October fizzled, but I've got a feeling that ceiling at 726 has turned into a floor and is just waiting to bounce this chart higher now that a base is developing. Finally, the technology stocks within the small cap realm are chugging along quite nicely. Like the consumer discretionary segment, I'd wait for a pullback here. This is definitely a "buy on the dip" group heading into 2015 though. I'll try and keep you guys apprised of any changes to the fundamentals and technicals within the small cap world, although being a bigger-picture idea, I'd say this analysis has a shelf life of at least a few weeks. Why all this trouble to talk about a group of stocks rather than just pick a few stocks themselves? Two reasons. The first reason is, this overview type of analysis opens up several trading options that may work better for you than a specific stock pick would. It's been estimated that 40% of an individual stock's movement is attributable to the sector or group it's in. A mediocre stock in the right sector can still bear more fruit than the best stock in the wrong sector. Besides, we've always strived to give you the important data nobody else is willing or able to give you. The second reason we're not naming specific names is, we've delegated that duty to our friends over at the Elite Opportunity service (which by the way, use a similar drill-down process). The good news is, the EO team is now doing stock-picking - for free - for those who sign up for the text and e-mail stock pick alerts. If you haven't signed up yet, you should do so now. It doesn't get any cheaper than free, and the folks who have signed up have already scored some nice gains with this complimentary service. Who knows? The next free trading idea may well be a small cap from one of the four sectors we discussed above. Here's how to sign up, or cut and paste this link: https://www.smallcapnetwork.com/pages/SCNEOL/v1/ Almost We have to give credit where it's due - the bulls are getting the job done. There's one last hurdle to clear, though, and for the S&P 500 it's 2075. That's where the index topped today, and it's where the S&P 500 topped on Friday. It's clearly a line in the sand, but above that level there's not a lot that could hold the market down in the near-term. The reason I'm holding onto my optimism, however, mostly stems from a look at the Russell 2000. After pushing up and off the lower Bollinger bands Monday and Tuesday of this week, the Russell 2000 moved above its 20-day moving average line today, and there's still room to keep climbing. The next potential impasse is 1192, where the index topped last week and where the upper 20-day Bollinger band is now. I guess this is my way of saying the market has some near-term bullishness in its grasp. How it handles the opportunity as early as tomorrow is the key. While I don't expect to see a prolonged rally develop from all of this with the market's valuation being what it is, a Santa Claus rally is in the cards. We'll be watching the resistance levels discussed above very closely this week, and we'll be poking and prodding them every day here in the newsletter for you guys. Hey, by the way, for those of you who are following Hydrocarb Energy (HECC), the company's going to be featured on the "New to the Street" television program on Thursday. You'll have to check your local listings for which station the show will be appearing on, but the program is scheduled to run at 9:30 am EST on Thursday. Here's the press release with the details. I think it's going to be the ION affiliate in most cases, though I can't say for sure where it will be aired in your locale.