See my H1:11 post last year on this topic for a reference point: Small Cap Sector Liquidity.

I have updated my small cap sector leading indicator graph and it clearly shows risk-off appetite during Q3/4 last year (click graph or here to enlarge image).

Now, Q4 is always a quiet period for JSE trade due to traders being away from their desks over Christmas and New Years. That said, Q4 actually saw a bit of recovery in small cap sector relative liquidity from the serious risk-off Q3 period when Eurozone worries escalated, amongst other 'End of World' scenario concerns.

Q3 has really dragged 2011's trend downwards (see red circle in graph above), but I remain bullish on 2012's prospects (see SmallCaps.co.za 2012 Forecasts). What this also makes me think is that Q1:12 will be quite important to see whether the downward trend created by Q3/4:11 is broken or not.

In order to see this, I would personally also keep an eye on the major resource counters as proxies for risk-on appetite that should filter down to small caps. In other words, if BHP Billiton and Anglo America begin to rise strongly this quarter/year, it is an extremely positive sign for investors valuations of the 'risky stocks' in the market (i.e. including the small caps).

The Small Cap Index (J202) is already up 2.3% from the first trading day of 2012, versus the ALSI (J203) that has risen only 0.5%. So, perhaps the original small cap trough reversal I identified last year does in fact remain intact..?

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