The stock market has a problem, and it's not even that the so-called major averages were struggling again and accelerating to the downside as of this writing -- most notably the

Nasdaq Composite

, recently down 2.2%. Rather, it's that small-cap proxies have shown a nagging bit of relative weakness of late, underperforming on the upside during Wednesday's big rally and showing more weakness since.

For example, the Russell 2000 was recently down 1.3% to 495.04, while the

Dow Jones Industrial Average

was off 0.3% and the

S&P 500

was lower by 0.8%.

But more importantly, and troubling to those with a technical bent, the Russell was trading below its 50-day moving average of about 503.50, having breached Tuesday's intraday low of 498.97 in today's session, reaching a nadir of 493.78.

Furthermore, the Russell's breach of 495 violates an uptrend line intact from the index's September lows in the 375 area, according to Rick Berry, formerly of Centennial Capital Management in Atlanta and now an independent analyst. This "trend line break" is also the neckline of a "head and shoulders" pattern for the index. (An oft-cited and bearish pattern, a head and shoulders is characterized by three peaks, with the middle one being highest. The troughs of the two peaks that flank it define the neckline.)

Citing these factors, Berry forecast the index will likely test support at 465 near term with possible weakness to 400 forthcoming. "Bank on it," he said, noting the Russell recently peaked intraday at 523.79 on April 17, thus failing to break through the longer-term downtrend from its top in June 2000 at about 545.

Elsewhere, the S&P SmallCap 600 has traded as low as 248.12 today vs. Tuesday's intraday low of 249.37. By comparison, the

Nasdaq 100 Unit Trust

(QQQ) - Get Report

has remained above its weekly low of 28.42 despite lately being down 3.5% to 29.86. (The S&P MidCap 400 has remained above its intraday low but was recently down 0.7% and has underperformed the S&P 500 this week.)

"There are fewer attractively valued stocks today vs. when the Nasdaq Composite was at 5000," said Tom McManus, equity portfolio strategy at Banc of America Securities. Reiterating a point made here on

April 22, McManus noted that the average stock has done extremely well in the past two years -- even as weakness in tech, telecom and mega-caps has "made everyone believe the market's done really poorly."

But having closed their value discrepancy with big-caps after years of outperformance, small- and mid-caps are "losing momentum now and are vulnerable to disappointment," he said.

Others say recent news that, among other small-cap offerings, the

(OAKEX) - Get Report

Oakmark International Small-Cap fund and

(FLPSX) - Get Report

Fidelity Low-Priced Stock fund are closing to new investors is anecdotal evidence that the end of small-cap outperformance is at hand. Some contend the heavy inflows into small-cap mutual funds are similarly telling: After taking in nearly 6% of the $57.94 billion that went into domestic equity funds in the first quarter, AMG Data reported small-cap funds had inflows of $888 million for the week ended May 8 vs. outflows of $1.2 billion for equity funds overall.


All that criticism is "valid and suggests we may be entering a period of consolidation," said John Bollinger, president of Bollinger Capital in Manhattan Beach, Calif. "This would be a perfectly reasonable place for small-caps to stop and regroup. Nothing goes up in a straight line. But in terms of the trend being over, I find that hard to believe on one week's evidence."

Bollinger, who has been bullish on small- and mid-caps since at least

June 2000 remains so and suggested "it's not so much

that the small- and mid-caps have done poorly

this week, it's that the stuff that had been hammered into the ground bounced."

Furthermore, Bollinger observed with interest (in the sense of the ancient Chinese curse) at just "how anxious people are to call an end to" small- and mid-caps leadership. "Every time I turn around somebody is screaming 'it's over for small- and mid-caps,' " he quipped, noting such claims have become more strident in recent weeks. "I wonder if I'm missing something, but my first bent is I should take a contrarian stance to that."

As to why so many are vociferously calling for an end to the small-cap reign, note that its occurrence is in the interest of market extremists at both ends of the spectrum.

For the bulls, the argument is that the end of small-cap, i.e. "value", dominance is indicative of a rotation back into the tech and big-cap giants that many investors are still (


) overweighted in. Bears, meanwhile, argue "the final phase of major down-legs often finds its way into the former market-leading groups," as Jay Shartsis noted earlier today on

That so many want small-cap to falter doesn't mean it will occur. But evidence suggests the time may be coming for small- and mid-caps to get a comeuppance, as well as those who've sought refuge in their midst.

Required Reading, Cont.

In a Q&A session following a speech today,

Federal Reserve

Chairman Alan Greenspan

reiterated his belief that housing is not in a bubble (

repeat: housing is not in a bubble

), compelling me to

once again quote extensively from Paul McCulley's May

Fed Focus

report at the Pimco Web site.


If capitalism in America depends upon always having a game in the casino that can be levered for capital gains that can be spent, then capitalism in America is just fine: Housing is the game, and Mr. Greenspan is both the croupier and the credit clerk. Mr. Greenspan would, no doubt, disagree with that phraseology, but he actually agrees with our analysis. ... Given that he had resolutely refused to publicly indict or exonerate the Nasdaq for bubble tendencies, I must admit I was surprised that he was willing to


exonerate residential housing for such proclivities."

In doing so, "Mr. Greenspan revealed the fundamental (Keynesian!) policy bet that he has made: During the rehabilitation of Corporate America from its sins of excess in investment and leverage, the American household will be encouraged to bid up houses, lever up houses, and to spend the capital gains winnings," McCulley continued. "Which, of course, begs the secular question of how Greenspan, or his successor, will end the housing game ... ?" (Not to mention when.)

The S&P Homebuilding Index was recently down 2.5%.

Aaron L. Task writes daily for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.