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Small-Cap Weakness Signals Trouble Ahead

By Chris Lowe, Editor-at-Large on October 9, 2014

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Source: Wikimedia

If you want to know what’s in store for the Dow and the S&P 500, take a look at what’s happening to small-cap stocks.

Investors see small caps as riskier than their large-cap cousins. That’s why small caps tend to lead the way up in a bull market – as risk appetite grows – and lead the way down in a bear market – as risk appetite wanes.

And right now, risk appetite among US stock market investors is clearly waning.

As I wrote yesterday in The B&P Briefing, our bonus letter for paid-up Bonner & Partners subscribers:

There continues to be a direct link between market cap (which measures the total value of all outstanding shares) and performance.

The S&P 600 SmallCap Index is down -5.4% year to date. The S&P 400 MidCap Index is up 1.1%. The S&P 500 Index of large-cap stocks is up 5%. And the S&P 100 Index – a subset of the S&P 500 that tracks the 100 biggest stocks by market cap – is up 5.5%.

And the S&P SmallCap Index is down -8.6% from its high for the year. That compares with a drop of just -2.6% for the large-cap S&P 500 from its year high.

In other words, investors are staying with this bull market – for now. But they’re getting nervous. Something we also saw happen in the lead-up to the 2008 crash.

This doesn’t mean you should panic. But we recommend you take the necessary steps now to protect your gains.

For more on how to do that, read on here.

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