• Composite Model Positive for Small Caps – As of March 31, 2014, the composite model is between the 55% and 65% threshold, which is a level that is favorable to small caps. I find it impressive that when the composite reading is within this threshold, small caps outperformed large caps by more than 7.8%, and when the reading is below 55%, small caps underperformed by more than 9.7%. This model would suggest it’s a good time to favor small caps and that following past periods when the model looked like this, small caps enjoyed a performance differential over large caps. We will keep tabs on this NDR model and let readers of our research know when it falls below 55%, which is when the model would favor large caps. Of course, it is important to remember that past performance can’t predict future results.
Potential Implementation
The European economic recovery is far from risk free, but the accommodative monetary policies seem to be favorable to continuing the momentum and could even provide a backstop if growth does not materialize. For example, the European Central Bank (ECB) has reaffirmed its commitment to keeping interest rates low by stating, “We firmly reiterate that we continue to expect the key ECB interest rates to remain at present or lower levels for an extended period of time.”4 Given this accommodative monetary policy, positive economic growth outlook and my belief that we are potentially still in the early innings of the earnings cycle, I remain positive on Europe and small caps in particular. I also want to emphasize the importance of diversifying and believe there are different ways to play the European recovery theme, depending on one’s conviction. To read our full valuation and growth update for Europe, please click here.
1Sources: WisdomTree, Bloomberg.
2Source: Ned Davis Research (12/31/13).
3Technical indicators attempt to predict the future price levels, or simply the general price direction, of a security by looking at past patterns.
4Mario Draghi, European Central Bank Press Release (04/03/14).
Important Risks Related to this Article
Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Investments focused in Europe may be impacted by events and developments associated with the region, which can adversely affect performance. Investments focusing on certain sectors and/or smaller companies may be vulnerable to any single economic or regulatory development. This may result in greater share price volatility. Diversification does not eliminate the risk of experiencing investment losses.