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OPINION

Autopilot...

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On December 10th, I did a playbook segment on “Making Money with Charles Payne,” (Fox Business Network- 6 PM), which featured the Russell 2000 small cap stocks that were stuck in a rut and the target of professional shorts looking for one last attempt at glory for 2014. While voicing caution, I felt confident the index would rally higher.

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These are companies with market caps typically under $5.0 billion and for the most part, the index has been driven by biotech names, although TriQuint Semiconductor (TQNT) and RF Micro Devices (RFMD) are among the top ten winners featured many times in our monthly newsletter and other services over the last couple of years.

Well, it happened on Friday, and it could be a harbinger if it happens in the early weeks of 2015- the small caps are catching fire and the Russell broke through to a new all-time high.

Look at the three-year chart and you can see where the index has been a laggard, not only against larger indices like the S&P 500 and the Dow, but its own performance in 2012 +19% and 2013 +32%.

But, here's the great news; up just 5% for the year means there could be much more upside. Moreover, the calendar is favorable for small caps which normally come in November... a spike in December will continue over the first five months of the new year.

Actually, I think everyone should pick a couple of names under $1.0 billion market cap, although not more than 15% of your total portfolio. This is not a green light to buy any dog and think it is coming back, but for small cap names with potential, you can get ahead of them.

In the meantime, the higher the market goes from here, the more likely money parked on sidelines for years will begin to trickle in...maybe even be a gusher. However, the bears will point to the next phase of the rally as further proof of how frothy it has become from mind-boggling margin debt and to the autopilot speed the market moves lately.

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The Faster they Climb?

Keep in mind, from a percentage basis, the higher the market gets, the less impressive the 100 point Dow moves. Nonetheless, after taking almost six years to get to 15,000 after hitting 14,000, the next three 1,000 point clips will come in 19 months.

Here's What History Tells Me:

Once the rally gets going, it gains amazing strength; see 1995 to 1999 with the 1,000-point move to the Dow, with 11,000 coming just five weeks after 10,000.

It also speaks to the massive impact of crashes- the collapse of the so-called Nifty-Fifty in the 1970s. It took 14 years for the Dow to get to 2,000 from 1,000 and seven years to recover and gain 1,000 points after the 1999 crash.


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