Mark your calendars: earnings season begins at 4pm sharp on April 11th when Alcoa reports.
Between now and then investors will pore over countless charts looking for any and every bit of information that could provide a leg up.
And it appears Oppenheimer’s Carter Worth may have spotted something, significant.
He says, technical signals suggest investors should take bullish positions in large cap names and either move to the sidelines or short small cap names.
Largely Worth draws this conclusion by charting trend revisions.
Analyst EPS Estimated Changes Q1
1week 3weeks 6 weeks
S&P 500 0% -0.1% +0.3%
S&P 600 Small Cap -0.2% -2.0% -5.3%
Source: Carter Worth, Oppenheimer
In essence Worth is looking at what analysts have been saying about earnings, 6 weeks ago versus 3 weeks ago versus 1 week ago.
And the conclusion that he draws is that there’s been very little revision in the S&P 500 but the revision trend has been quite negative for the small caps.
Looking at the full year he sees much the same.
Analyst EPS Estimated Changes 2011
1 month 3 months 6 months
S&P 500 +01.% +2.1% +2.8%
S&P 600 Small Cap -0.7% -0.7% -0.6%
Source: Carter Worth, Oppenheimer
”The pattern that emerges here is important,” he concludes. “There’s a negative trend for small cap companies and a quite positive trend in large cap names.”
And Worth says the trend makes all the sense in the world. “Small cap always outperform coming off a bottom,” he says. “But typically in the 3rd year the rate of outperformance starts to abate and large caps catch up.”
What’s the trade?
Favor large caps versus small caps. You can play that being long the SPY versus short the IJR, says Worth.
