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Midday Wrap: Small-Cap Drop a Sign of a Greater Fall:

NEW YORK (TheStreet) -- The S&P 500 and Dow hovered near new highs Tuesday while the iShares Russell 2000 small-cap index (IWM) fell more than half-a-percent. The divergence, which has persisted for the past couple months, had some investors on StockTwits' arguing that the larger indices would soon have to follow small cap stocks' lead.

Large - small cap gap is getting worse now. $SPX $SPY $RUT $IWM

? David Durand (@SunAndStorm) May. 13 at 12:14 PM

$SPY $SPX $IWM I don't like that divergence that started in April...

? Rish (@androsForm) May. 13 at 12:02 PM

Small-cap performance is often called a harbinger for the market. As investors become more risk acceptant and bullish, they are likely to invest more in newer companies that promise large growth and returns. Conversely, as investors become more risk averse and bearish, they are likely to take their money out of small companies and put it in relatively safer, established companies considered less likely to go out of business or see the value of shares halved after a poor earnings report.

The bears say, this year, small caps will once again lead the market. And the roughly 3.3% drop in the small cap index means they will lead the market down. Sentiment on the iShares Russell 2000 is 60% bearish.

I'm still under the belief that the divergence will resolve with $SPY following $QQQ $IWM to the downside

? Jason Yi (@Jason100) May. 13 at 12:35 PM

But other investors say this time could be different. Low interest rates, supported by the Fed, have given investors little reason to put their money in bonds. And, after getting burned by the housing market during the great recession, many investors don't want to have too much money tied into property. As a result, stocks are the most attractive investment vehicle out there.

$SPY Just went long, why turn down free money?

? Exponential Trader (@ExponentialTrader) May. 13 at 12:35 PM

Still, most investors watched small caps with a wary eye Tuesday for signs their sickness could spread.

$IWM down hard again and $SPY flat....saw this movie last week. Wondering if yesterday was an outlier...

? David Fabian (@fabiancapital) May. 13 at 01:02 PM

At the time of publication the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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