Last month we highlighted that small caps had been a bit sluggish since May compared to FTSE 100 index. Well in the supposedly quiet month of August smaller companies fairly took off, up 17% compared to just 7% for the footsie. It is also telling that during August there were a number of days with a raft of positive news, yet the main markets in the UK and beyond hardly moved.

Strange goings on. Why the dichotomy?

While footsie, representing te largest companies, has a very strong international bias, clearly the small cap indices do not, and the message appears to be that investors are confident about a domestic cyclical recovery (rightly or wrongly), but not so sure about the global dimensions to the recovery.

For example, can there be much more to go for in miners and the like once the Chinese have re-stocked? And the banking system has been saved by a tidal wave of Government money, and prices have recovered sharply to reflect that new reality, but from these levels how can you possibly put a value on UK banks?

And in the US yields on 7 year Treasury Bills went down through 3% in recent days sending a clear signal that they are not confident in their own domestic recovery (something which is not reflected in their own elevated stock market indices).

While banks and miners have led the UK market recovery, the mega caps and other defensive sectors have underperformed sharply. For example, amongst pharmaceuticals, oil, tobacco, utilities, and telecoms there is a range of high quality blue chips with high and well covered yields, plus limited business and financial risk.

Moreover analysis by Rob Arnott reached the conclusion that value stocks (which typically includes these safer high yielders) have been punished by the market in the recovery since March, and appear cheaper than at any time other than in 2000, just before the tech bubble burst (and from when these value stocks went on a 7 year bull run relative to the rest of the market).

Interestingly a number of these overlooked larger companies began to outperform in August at the same time that smaller companies surged. You could do worse than take your cue from the market: go for a bar-bell approach with well-researched financially strong smaller companies at one end, and a selection of mega caps at the other. From a fund perspective you would buy M&G Smaller Companies and Newton Higher Income to achieve this effect.

And as we look forward to the frequently turbulent waters of the Autumn, you don’t have to be bullish or bearish – just be careful.