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Small- and Mid-Caps: Is It Time?


Is it safe to climb back into small-cap and mid-cap growth stocks?

After Wednesday's buoyant Nasdaq rally, some experts say it is.

Smaller stocks got clipped hard last week and again Monday. And their rebound Tuesday was uninspiring.

But on Wednesday, a 3.3% rise in the Russell 2,000 small-cap index matched that of the Nasdaq 100, which is loaded with tech giants. More encouraging, the Russell's technology component zoomed 6.3%.

The picture is even brighter among mid-caps, which held up far better than other groups last week. The Standard & Poor's 400-stock mid-cap index rose only 2.4% on Wednesday, but that was enough to notch an all-time high.

The rally convinced some market watchers that the worst is over.

"As far as I'm concerned, small-cap growth is still the place to be," said John Bollinger, president of "Not necessarily small-cap technology, though that's not a bad idea. But it's bigger than that. It's small-cap growth."

Bollinger hinges his thesis on the 1,650-stock Value Line index.

Unlike many other indexes that are based on the market capitalization of their stocks, the Value Line index is "equal-weighted." That means a small stock carries as much influence as a large one.

Because the index is split between small and large stocks, as well as so-called new-economy and old-economy names, the index shows how the bulk of higher-quality stocks are doing, Bollinger said.

The index moved sideways last week before popping to an eight-month high Wednesday, a clear sign that small-cap and mid-cap stocks are holding up well, he said.

Technical analyst Mike Hurley at E-Offering is encouraged by the performance of mid-caps. He points out that the S&P 400, which broke out of a "base" Feb. 29, did not undercut that level in last week's sell-off.

"It was the picture-perfect [bullish] test of a breakout," he said.

Not everyone is so enthused about smaller stocks.

Scott Bleier, chief investment strategist at Prime Charter Ltd. in New York, thinks large-cap tech stocks may have more fuel in the next few weeks. First-quarter "window dressing" is prompting fund managers to plow cash into recognizable names, he said.

For example, Intel Corp. (ticker symbol: INTC) has added $80 billion in market capitalization in the last five days, he said.

Better-known small- and mid-cap stocks should fare well, but investors are staying away from second-tier stocks, he said. "The very, very speculative issues have not sprung back--and may not spring back," Bleier said.


Markdown on Luxury Stocks

A Merrill Lynch analyst's report Wednesday saying that rising interest rates could hurt sales of jewelry this year sent shares of Zale Corp. down 8% and shares of Tiffany & Co. down 4%. Meanwhile, Movado Group Inc.'s stock plunged 37% after the watchmaker said its latest-quarter earnings will be far below expectations, citing an inventory write-off and related problems.


Ticker Wed. close YTD % P/E Company symbol and change change ratio* Movado Group MOVA $10.81, -$6.50 -50.4% 6 Tiffany TIF 71.88, -3.44 -19.5 37 Zale ZLC 46.19,-3.75 -4.5 16 S&P 500 index SPX 1,500.64, +6.77 +2.1 32


*Price-to-earnings ratio based on the previous 12 months

Source: Bloomberg News

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