This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Small-Caps Warning to Nouveaux Bulls

History is a vast early warning system. -- Norman Cousins

NEW YORK ( TheStreet) -- Over the past three weeks I have been making the case in my writings and various media appearances that market internals were suggesting the odds of a correction were rising despite the focus on Dow 14,000.

European markets have clearly been wobbly, China suddenly appears to be tightening liquidity and bond yields are not convincingly rising above key resistance levels.

The Nouveaux Bulls who are under the assumption that stocks can not fall because of the "Bernanke Put" fail to remember there were two corrections in 2012 despite it being the best year for equity averages since 2009 in the U.S.

This is not about opinion. What I think and what you think does not matter. What matters is what the person you're selling to thinks, because that is the person who sets price.

There are a large number of reasons on the macro front to be concerned in the near term ranging from the upcoming Italian elections to the U.S. sequestration. Clearly growth domestically has been more potent than overseas, which has helped to cause our markets to do relatively well. However, I question whether this sentiment is about to change.

Take a look below at the price ratio of the iShares Russell 2000 Index (IWM) relative to the SPDR S&P 500 (SPY). As a reminder, a rising price ratio means the numerator/IWM is outperforming (up more/down less) the denominator/SPY.

Small-cap stocks by their nature tend to be much more sensitive to domestic growth than global growth. As such, when high beta small-cap stocks underperform, it signals bets on a slowdown in domestic activity relative to global pickup. We know clearly that the cyclical trade globally is under attack given the breakdown in commodities and poor performance in emerging markets.

Note that the trend in strength of high beta small-caps appears to be waning, and may soon turn down.

The implication? Sentiment may be souring on the U.S., just as gas prices continue their rise and the payroll tax holiday expiration gets felt. The consumer may be in trouble, and so too then would be the Nouveaux Bulls.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
SPY $205.72 0.37%
IWM $110.91 0.59%
AAPL $92.72 -0.56%
FB $119.49 1.43%
GOOG $711.12 1.38%


Chart of I:DJI
DOW 17,740.63 +79.92 0.45%
S&P 500 2,057.14 +6.51 0.32%
NASDAQ 4,736.1550 +19.0610 0.40%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs