Small Cap Bounce? In times of great pessimism there is opportunity. But also, there is almost always a small cap bounce in January. This occurs once tax-loss selling is over, because small cap stocks are less liquid and tend to decline more on incremental tax selling. With the weakness in the market this year, this bounce could be pronounced. Also, small caps are historically more expensive than large caps, because they are growing much faster. But this year, relative to large caps, they have become much cheaper. In fact, on a relative basis, they are back to 2008 levels. Finally, for the optimists, in almost every other market cycle, small caps have led the market out of a bear market, providing strong returns when confidence slowly returns to the market.
And further.......Keep in mind there is also year end portfolio positioning: many fund managers do not want to show that they owned stocks with big declines and will exit some names to save face when they need to report security positions. (5iResearch)