Tags: Winter | small-cap | stocks | large

StreetAuthority's Winter: Small-Cap Stocks Are Flashing Worry Signs

By    |   Monday, 09 June 2014 12:10 PM

The disconnect between rising large-cap stocks and smaller stocks, which are down in 2014 amid the great bull market, is signaling a yellow caution light that investors should ignore at their peril, according to StreetAuthority columnist Eric Winter.

One primary cause for concern is that, over time, small-cap stocks tend to outperform larger stocks. For instance, since the current bull market began in 2009, the S&P 500 index of large stocks has served up a gain of more than 165 percent, but the small-cap Russell 2000 index has delivered an even higher return — 222 percent.

"What's giving me a reason to worry now is that the S&P 500 has continued to rise this quarter (to the tune of 3.7 percent), while the Russell 2000 has pulled back about 7 percent," Winter noted.

Editor’s Note:
Pastor Explains His Biblical Money Code for Investing


"Many are citing the extremely high valuations some of these small-caps are stuck with now, given their meteoric rises in stock price. Price-to-earnings (P/E) ratios have exceeded those during the tech bubble days in some cases, sparking concerns that a pullback is inevitable."

Winter said data from Bloomberg and Bank of America revealed that in April, smart-money investors, such as hedge funds and other asset managers, sold almost $3 billion in futures contracts against the Russell 2000, the largest amount relative to average levels since 2004.

Billionaire Paul Singer of Elliott Associates is among the small-cap naysayers and has disclosed a $424 million put position in the iShares Russell 2000 exchange-traded fund (ETF), a popular small-cap ETF, Winter said.

Winters' bottom line: "While I'm usually an advocate of buying the dips, this disparity between large-caps and small-caps might mean it's time to take profits on some of your small-cap funds or investments, particularly if they are trading at sky-high P/Es. Just as they were the fastest to rise, they will likely be the fastest to fall in a market turnaround."

USA Today advised investors to take notice of the fact that Wall Street's best known "fear gauge," the CBOE Volatility Index (VIX), hit its lowest point since 2007 last week and was within 2 points of its all-time low.

"A low VIX reading could mean investors are too complacent, potentially setting themselves up for sizable losses and big disappointment, similar to what happened in 2007-08 when investors didn't see the mortgage crisis coming," USA Today said.

"Or it could be a bullish sign that suggests there is little that can derail the stock market's current momentum."

CNBC and Yahoo's Talking Numbers noted that at 62 months and counting, the S&P 500 index is very close to its longest bull run since 1994 to 2000. In fact, if it continues on to 64 months, it will be the longest bull market in more than 85 years.

Ari Wald, head of technical analysis at Oppenheimer & Co., said there are ample reasons to maintain a bullish long-term view of the S&P 500, including loose Federal Reserve policy, attractive valuations of stocks vs. bonds and continued growth in the U.S. economy.

"When you consider that we're just getting above levels from 13 years ago, we think this is a much stronger structure that makes the case for higher highs and higher lows over the coming years," Wald told Talking Numbers.

Editor’s Note: Pastor Explains His Biblical Money Code for Investing

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InvestingAnalysis
The disconnect between rising large-cap stocks and smaller stocks, which are down in 2014 amid the great bull market, is signaling a yellow caution light that investors should ignore at their peril, according to StreetAuthority columnist Eric Winter.
Winter, small-cap, stocks, large
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2014-10-09
Monday, 09 June 2014 12:10 PM
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