Indicators – Market Capitalization – Previous Returns - BTO Option Volume Data
April 30, 2012
With April coming to a close, we are about a third of the way through the year. The first three months of the year were very bullish for stocks, while April has struggled. In the week ahead it is interesting to take a look at how individual stocks have performed, depending on certain characteristics. A look at several indicators helps to clarify the situation:-
1. Market Capitalization Returns
This survey was executed by taking a range of various stocks – then by separating out the 20% that had the highest and lowest market caps, an average return each month was accomplished. The returns of the other stocks were also included. The chart suggests that January would have been a good time to be long the small-cap stocks, and March also shows small-cap out-performance. One interesting note is that as the market has struggled in April, the small-cap stocks have not given back any more than the big-cap stocks, as is often the case.
'Market Capitalization' is the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
This indicator is frequently referred to as "market cap". If a company has 35 million shares outstanding, each with a market value of $100, the company's market capitalization is $3.5 billion (35,000,000 x $100 per share).
Company size is a basic determinant of asset allocation and risk-return parameters for stocks and stock mutual funds. The term should not be confused with a company's "capitalization," which is a financial statement term that refers to the sum of a company's shareholders' equity plus long-term debt.
The stocks of large, medium and small companies are referred to as large-cap, mid-cap, and small-cap, respectively. Investment professionals differ on their exact definitions, but the current approximate categories of market capitalization are:
• Large Cap: $10 billion plus and include the companies with the largest market capitalization.
• Mid Cap: $2 billion to $10 billion
• Small Cap: Less than $2 billion
2. Prior Month's Returns
An important indicator is how stocks have performed in the prior month depending upon their returns. Often, it seems the stocks that perform the best during one period do the worst over the next period, and vice versa. This is how it happened in January. The worst stocks in December averaged a gain of almost 13% in January, while the best-performing stocks in December averaged just a 7% gain. April is not as typical. With the market struggling in April after three great months, you might expect to see some of the outperformers from March getting hit the hardest. However, the best stocks in March have lost less than the worst performers.
3. Option Call and Put Buying
Finally, another indicator of importance is the buy-to-open (BTO) option volume data. Data is obtained from three different exchanges:–
• the Chicago Board Options Exchange (CBOE),
• the International Securities Exchange (ISE), and
• the NASDAQ OMX PHLX (PHLX) –
that specifically isolates option volume that was buyer-initiated.....see Stock Exchanges.
Looking solely at this indicator, the data suggests that stocks with a predominance of call buying have fared better than those with heavy put buying of late. Each month, except for February, shows that stocks with the lowest put/call ratio heading into the month have the best returns. In fact, during the flattish month of April, the stocks with the most call buying compared to put buying show a slight gain, on average.