Salient to Investors:

  • The Russell 2000 VIX is up almost 11 percent in 2014 versus a 6.6 percent drop in the VIX and at its highest level since 2006 relative to the VIX. Russell Rhoads at CBOE’s Options Institute said the premium indicates we would get a bigger pullback in small-caps than large-caps in a market pullback.
  • The Russell 2000 Index is at 20.5 times earnings, close to its highest level since 2007.
  • David Kostin at Goldman Sachs said small-cap stock returns will be limited after analysts cut 2014 earnings forecast by 13 percent. Goldman predicts the Russell 2000 will rise 4 percent in the next 12 months, and the S&P 500  will rise 6 percent.
  • Patrick Fay at Russell Investments said institutional investors are buying options linked to the small-cap index for downside protection.
  • John Canally at LPL Financial is overweight small-caps, saying faster US growth and the busiest quarter for deals since 2007 make them attractive because they are very focused on the US, which is one of the best stories.
  • Russell 2000 companies get an average of 83 percent of their sales from North America versus 70 percent for S&P 500 companies.
  • Hedge funds et al are net short the most contracts since December 2011.
  • Max Breier at BMO Capital Markets said valuations are not as compelling as two years ago, so short-sellers are picking the highest valuation stocks which naturally occur in the Russell 2000 versus the S&P 500.


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