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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: ted birnbaum who wrote (53677)	6/11/2000 11:56:00 AM
From: Saulamanca	Respond to of 99985

Capital Growth Topics #314: Small Cap Growth There has been some concern voiced recently about the usefulness of the Russell 2000 as a gauge of small-cap stocks. It seems that since the last rebalancing on June 30 1999 based on May 31 data, a small list of stocks has come to dominate the index. The next rebalancing is due at the end of this June based on end-of-May data; therefore we will have to live with this situation for a while. Is it a problem? I think not. The Frank Russell Company created the Russell 3000 as a benchmark to measure market performance. It consists of the 3,000 largest stocks traded in the US. The 3000 is broken down into two sub-indices, the 1000 and the 2000. The 1000 consists of the largest 1,000 companies in the 3000 and the 2000 represents the remainder. The cutoff at the last rebalancing was at $1.3 billion. The Russell indices are all capitalization-weighted indices. They are computed by multiplying the number of outstanding shares of each company by the most recent price and then computing the index. This gives each company a weight in the index equal to its market value. The larger companies count more than small ones and the 1000 comprises about 92% of the weight of the 3000. Growth is what created the current "imbalance" and with the next rebalancing, most of the currently dominant stocks in the Russell 2000 will graduate to the 1000. What has happened to the Russell 2000 is that some of the companies have grown so dramatically in market capitalization since the last rebalancing that they have come to "dominate" the index. This is the very definition of what one would expect from small-cap growth stocks. Indeed, the surprise would be were the index not to become skewed over the year. I used the Russell 2000 this week on CNBC to illustrate the insurgency of small-cap growth stocks as it exemplified the story I wanted it to tell. Confirming this usage is the Russell Company's breakdown of the index into growth and value components. Year to date the growth component is up 16.6% while the value component is down 0.15%. This compares to the Russell 1000, where the growth component is down .5% and the value component is down 12.5%. Thus the move isn't simply into small-cap stocks; it is into small-cap growth stocks. It is our view that small-cap growth is the place to be. John Bollinger, CFA, CMT 25 February 2000 bollingerbands.com