Small Caps May Be the Key
The uptrend in the broad market has captured everyone’s attention. The trend remains in place, but the outlook is getting cloudy. Economic data has been mixed, earnings are mixed and future growth is being questioned. The move higher is predicated on growth. If this growth doesn’t materialize early in 2010 it could get ugly for investors. The recent volatility and moves against resistance are showing the doubts of investors. Thus, I have continued to warn and encourage the use of stops to protect against the downside risk should investors turn and run for safety.
There is one sector I have been watching for signs of growth, small cap stocks. Historically these are the first to push higher and take on a leadership role. Since the lows in March the S&P 600 Small Cap Index has been at the forefront of leading the markets higher. However, since the September highs this sector has been lagging. Thus far it has failed to recapture the high in October. As you can see on the chart below we have recaptured approximately 62% of the decline off the high. The struggle shows in the up and down movement for the index.
IJR, iShares S&P 600 Small Cap ETF is the chart above and you see the declining volume since the high in October. I would use this as one proxy towards the future outlook of the broader markets. Without the participation of these stocks it will be hard to the trend to continue higher. Plenty of warnings for investors to heed. The recent surveys show 90% of investors are bullish, yet the markets are stuck in neutral. Take note of the warnings, watch the small cap index and use your stops according to your risk level.
Watch the video for more info on this play.
