Dow Jones 10641.62 -55.97 8:45 am PST, August 4, 2005  NASDAQ 2199.83 -16.98 For info, visit access.smallcapnetwork.com S & P 500 1239.14 -5.90 Change your subscription status here Russell 2000 677.85 -5.93 VOLUME 05: ISSUE 59  Feature: Big Caps or Small Caps? What to do... As markets flirt with or hit 4-year highs, at least on some market indices, the question arises: should investors be buying big cap or small cap stocks? We had a tech look at three indexes and the answer appears fairly clear. If you don't have a smallcap section in your portfolio, you're likely missing out. And you'll continue to do so. In the case of the Russell 2000, the benchmark smaller cap index, which represents the 2000 smallest stocks or 8 percent of the market cap within the stock universe of its big-cap brother the Russell 3000, the numbers are quite compelling. Over the last 5 years, the Russell 2000 has shown an average annual gain of almost 8 percent, while the big cap biased 3000 has posted an average annual loss of just under 1 percent over the same period.  FYI, the new Russell Microcap Index shows an average annual return of almost 12 percent for the last five years. Be aware, though that these numbers are back-tested as the index only opened in June 2005. I like real trading history as opposed to mathematical exercises. But it does make an interesting positive add to our discourse that small is definitely better. Over the last 2 years, the Russell 2000 also trumped the S&P 500 with a cumulative gain of over 40 percent. If you had simply been in the S&P since 2003, sure, you'd be ahead, but only by a bit over 20 percent. The five year comparative numbers are even more dramatic.  That was then. What about now? Unlike the S&P chart--which we'll look at in a moment-- the Russell 2000 looks very constructive. The technical picture shows no signs of weakness and continues to make new highs with no sell signals apparent. We could well see the Russell go another 100 points higher. As the 'new regime' of investing unfolds, the best money is obviously made by being in the right small stocks. That said, there is nothing really new about this approach. The historic numbers and the above chart evidence the rationale for having at least a portion of your assets in the smaller end of the market. We will be the first to admit, there is more risk in the smallcap market. However, as the numbers show, that risk is handsomely rewarded when one picks the right stocks. Smallcaps tend to lend themselves to trading, but the long-term numbers evidence that buy and hold of appropriate stocks also works. Just as in the big cap market, research and due diligence are paramount in making smallcap picks.  At SmallCap Digest, we employ methods that we believe mitigates that risk to a great extent for our readers, which is why we're right way more often than not. And, in the smallcap market, given the volatility, one good winner can make up for several underperformers. Our record shows that we focus on the former and tend to avoid the latter. Big Caps Lumber Along.  As represented by the S&P 500, investing in big stocks has been less than stellar. It's been acceptable in the recent past, but the above 5 and 2-year returns show that small stocks are where the action is, increased risk and all. We're looking for a pullback in the S&P from around current levels. The recent strength is likely due to the activity in the housing, oil and retail sectors. The index is up against the .618 retracement which makes the recent strength suspect. We believe that even if the index wants to go higher, it will likely ' clean house' before it does. At current levels, we wouldn't recommend being heavily weighted in S&P stocks. There will be a time and place for traders to buy these stocks. We wouldn't chase new highs in the big caps and instead wait for pullbacks to initiate or add to positions. When is a house a home? I believe that there will soon be--and may be underway already-- a sea change in investor psyche, which has been somewhat anti-stocks of late. Money is currently playing in things like energy and housing stocks, which have likely run their course. Or at least the easy and majority of the gains are already upon us. In a rare moment of clarity, CNBC told me yesterday that big REITS and funds had been systematically dumping their housing stocks recently. That money has to go somewhere, as will the energy cash once that begins to bore investors. Everyone thinks energy is going to rocket to untold heights.  As we've said before, everyone is usually wrong. For my money, those energy/housing stock funds will find there way into the tech and biotech markets. And don't get me started on where the pure real estate money will go when that sector goes south or at least fails to perform. Our bullish take on the biotech markets is well known. Check our archives if you want to see our thoughts and rationale. And of course, our treatise wouldn't be complete without checking out the prospects for the NASDAQ. The recent rally is merely a small part of the retracement from the massive decline of 2000. We've taken out the 4-year high and appear headed for the .382 level at around 2312. While there could be pullbacks before we hit that level, we would view them as excellent entry points rather than anything nefarious.  The chatter over the last few months has been all about energy and housing--both stocks and physical real estate. When everyone thinks that both those asset classes are touted as the Holy Grail it's likely time to look elsewhere. As noted by the explosive --albeit stealthy-- growth in the biotech market as evidenced by the Amex Pharmaceutical Index (AMEX: BTK), the smart money is moving into the sector. Similar rises have also been noted in the telecom and semi sectors/indices as well.  And that money will move into the smallcap sector first. The risk/reward is simply better. Always has been.       We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 3525 Del Mar Heights Rd #334 San Diego, CA 92130 Subscribe Information is power and timely information is profitable. Become informed and profit from SmallCapDigest Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. 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