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TheStreet Open House

Reduce Your ETF Risk, not Well-Deserved Rewards

NEW YORK (ETF Expert) -- Jonathan Krinsky, chief market technician at MKM Partners, is the latest commentator to add perspective on the trouble with U.S. small-cap stocks. He noted that roughly 80% of large-cap S&P 500 components are currently trading above their long-term trendlines (200-day), while only 40% of small-cap Russell 2000 components are above their 200-day moving averages.

According to Krinsky, it marks the widest divergence between the two benchmarks since 1995.

A variety of market watchers have been pointing to the poor prospects of an asset class with an aggregate price-to-earnings ratio of 100. On the other hand, investors have been paying a substantial premium to own smaller company growth for several years, irrespective of the price-to-earnings or price-to-sales data. Might the selling pressure be attributable to something other than overvaluation?

Perhaps.

Consider a number of recent concerns about the U.S. economy. "Core" retail sales fell 0.2% in April, suggesting that the treacherous winter cannot be blamed for why consumers held onto their wallets in the springtime.

In the same vein, the Commerce Department originally estimated the U.S. economy expanded ever-so-slightly in the first quarter of 2014 (0.1%). Yet, estimates are being revised dramatically lower to reflect an economy that may have contracted for the first time in three years (0.6%-0.8%). While some investors may choose to look beyond "old information," other investors may be turning squeamish on the notion of holding onto growth at any price.

The shift away from smaller company ownership can be seen in the iShares Russell 2000 (IWM): S&P 500 SPDR Trust (SPY) price ratio. Relative weakness in IWM is evident in the price of IWM:SPY falling below and staying below a long-term 200-day trendline. Equally compelling? The 50-day moving average crossed below the 200-day moving average in late April, suggesting that small-caps may remain out of favor for the foreseeable future.

IWM SPY Price Ratio

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