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Small Cap Stocks Show Investor Risk Tolerance Crumbling

The S&P 500 is trading just under an all-time high of 2,000. The markets have had small pullbacks recently but nothing even close to a correction. While most of the media and analysts are calling for a move higher, some are starting to signal caution. The reason for caution has become apparent from various leading indicator signals that should be noted by any investor looking to be on the cutting edge of the next stock market move. First, the small cap index, the iShares Russell 2000 Index (NYSEARCA:IWM) is already down by over 5% off its all-time highs. Why is this concerning? Small caps are the highest risk area. When investors start to move out of the market they sell that sector first. Next, home builders are collapsing, down 10% from their highs. This was the leading reason for an economic recovery. The massive sell on these stocks is a major concern to economists and market analysts such as myself. These signals tell of a correction that may not be far off.

Analysis on the markets shows they are still resilient. It is becoming very likely we will see the stock market have one final move up. This move will close the S&P above 2,000 and the NASDAQ above 4,500. Think of this as the last gasp for a broken market. The catalyst for this move could come in the next few days as the first look at GDP will be reported Wednesday morning at 8:30am ET. Wednesday afternoon will see the FOMC Policy Statement followed by the Non Farm Payrolls Report on Friday.

Gareth Soloway

Views: 191

Tags: Caps, IWM, SPY, Small


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