By David Scher
Head of Data and Development at LD Micro
2016 was an interesting year. It was the first full year that the LD Micro Index (LDMi) existed. It is worth noting that our constitution criteria changed fairly dramatically on February 1st, 2016, using closing prices as of December 31st 2015, so most data points are worth looking at starting February 1st. Here is a link to our criteria. There are almost 1,090 stocks in the LDMi.
At first glance, we were somewhat disappointed to find that the LDMi closely paralleled the Russell 2000 ($RUT) and Russell Microcap ($RUMIC):
Once you start considering the main driver of events in 2016, it is worth simply separating the year into two stages: pre-election and post-election.
Here is pre-election comparisons:
In the screenshot above, from February 1st through November 8th, you can see that the LD Micro Index was up nearly 3% more than the $RUT and 5% above the $RUMIC. If you look at brief periods in May and October, you can see that there was a massive ~10% gap between the LDMi and the Russell indices.
Here is a chart of post-election:
RISK ON! The interesting thing to note here is that the $RUMIC outpaced the $RUT in that 2 month period by a healthy amount. The average market cap of the $RUT is $2B, $RUMIC is ~$500m. Both of these indexes have constituents that likely enjoy far more institutional support than the LD Micro Index, which has an average market cap closer to $160m. These deeper pools of liquidity jumping in to “riskier” equities post-election could be the reason why the Russell indexes made up so much ground to finish the year neck and neck with the LDMi.
Another theory is that the LDMi contains approximately 22% Canadian equities and these stocks held the index back. We have not had time to do these analyses but it is likely there is something to this notion.
On the surface, the final numbers for the year are somewhat disappointing in that the big picture does not show that true microcaps ($50–$300m market cap) acted a whole lot different than their larger cousins. But the reality is that they did behave much differently and once you break the year down into sub-sections.
Taken as a whole, this what the year (from February 1st) looks like:
We look forward to continuing to gather a track record of the behavior of microcap stocks, analyzing the data, and being able to use this information to gauge the combined activity of a small (market cap, not listings) sector of the financial world.
Our next reconstitution will go into effect February 1st, 2017, and we will be putting out a press release with the constituents.
Please see our website for more details: www.ldmicro.com
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