Thrilling Thursday – What Does the Russell at an All-Time High Tell Us?

U.S. small-cap stocks surged to a record Wednesday as investors turned their focus to U.S. economic improvement and the smaller, nimbler companies that could be best-positioned to benefit.

Russell Investments' index of 2000 small-capitalization stocks rose 2.6% to 871.13 Wednesday afternoon, after hitting an all-time intraday high of 872.28 earlier in the session.  Wednesday's rally came on the heels of a year-end surge. The RUT has gained 13% since touching a recent low Nov 15th. The S&P, which tracks larger companies, has added 7.3% over the same period.

"As the U.S. economy gets helped by better housing, small is going to do better," said BAC's Steve DeSanctis in the WSJ. "Then you throw in earnings growth for the first time in a while, and they've had a very nice, strong rally here."  Mr. DeSanctis pointed to analysts' forecasts that companies in the Standard & Poor's index of 600 small-cap stocks will report earnings growth of 4.5% for the fourth quarter, compared with 3.5% for middle-sized companies and 1.2% for their larger counterparts.  Small-cap companies tend to get a larger share of their revenue from the U.S. than bigger firms, which could help their bottom lines if the housing recovery continues, Mr. DeSanctis added.

We came right up to the levels we expected and, in fact, the S&P finished the day at 1,452, which was my target for the S&P to finish 2012 (1,450) so it turns out I was one trading session off in the end.  In yesterday's Morning Alert to Members, we worked out the short-term 4 and 5% lines we expected our indexes to test during the next couple of days and those were: 

• Dow: 13,319 & 13,447 (finished 13,412) 
• S&P: 1,442 & 1,456 (1,452) 
• Nas: 3,028 & 3,056 (3,112) 
• NYSE: 8,580 & 8,660 (8,632) 
• RUT: 858 & 866 (873)

As usual, the Nasdaq and Russell are leading us higher but we never got our third breakout to confirm the trend so we did 1/3 covers to lock in some of our bullish gains on some of our positions.  Mostly it was a watch and wait day with no new trades but I did put up a new spread entry on AAPL, in afternoon chat, for those who missed the party the first time.  In this morning's chat, we discussed the Big Chart and …
This article will become free after 48 hours (see below for free content). To read the rest of this article now, along with Phil's live intra-day comments, live trading ideas, Phil's market calls, additional member comments, and other members-only features - Subscribe to Phil's Stock World by clicking here.