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Yellen, Icahn Comments Put a Lid on Small-Cap Stocks, May Hurt Larger Market

NEW YORK (TheStreet) -- Both policymakers and hedge fund managers alike have taken a cautious tone regarding equity market valuations lately, causing selling pressure in small-cap stocks. This could ultimately limit further moves higher in U.S. equity indexes.

At yesterday's hearing in Congress, Federal Reserve Chair Janet Yellen stated that some aspects of U.S. securities markets, such as biotechnology and social media stocks, were "stretched" in their valuations.

This led to declines in the iShares Nasdaq Biotechnology Index ETF (IBB), MannKind (MNKD), Geron (GERN) and Ariad Pharmaceuticals (ARIA) in the biotech space.

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Similarly, prominent social media companies such as Twitter (TWTR), Facebook (FB), Yelp (YELP) and LinkedIn (LNKD) sold off.

Yellen's comments came on top of last week's remarks by billionaire activist investor Carl Icahn, who told Reuters that it is time for U.S. stock market investors to tread carefully after the run-up on Wall Street.

"In my mind, it is time to be cautious about the U.S. stock markets," Icahn told the news outlet. "While we are having a great year, I am being very selective about the companies I purchase."

Icahn did not respond to TheStreet's inquiries on investor sentiment on small-cap stocks by press time on Wednesday.

With negative sentiment swirling around equity valuations, the iShares Russell 2000 Index (IWM) has fallen close to 5% off of its highs of $120 in the last two weeks.

Investors are becoming more cautious -- as both Yellen and Icahn recommended -- which has led to the relative leadership of larger-cap names over smaller-cap names. Small-cap stocks are usually perceived as having higher risk and being more speculative.

This issue with small cap stocks lagging is that it threatens to hold back gains in other indexes as well, such as SPDR S&P 500 (SPY), SPDR Dow Jones Industrial Average (DIA), and PowerShares QQQ (QQQ).

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