NEW YORK (ETF Expert) -- CNBC commentators and Bloomberg analysts have spent the last few months explaining how the Federal Reserve's measured withdrawal (a.k.a. "tapering") from electronic dollar creation (a.k.a. quantitative easing) is a sign the U.S. economy is capable of standing on its own.
Personally, I believe that it should be allowed to stand on its own regardless; it has been five years since the collapse of the financial markets. The questions before us, however, are whether or not the U.S. economy has transitioned to a self-sustaining creature and whether or not investors are embracing the Fed's expressed confidence.
On the first issue, it is difficult to see how the U.S. economy has made the transition already. Recent data suggest that manufacturing is slowing, mortgage applications are falling and full-time positions are difficult to come by. This is not to suggest that all incoming information has been dismal. The service sector expanded briskly in January and weekly jobless claims remain relatively muted. Nevertheless, at this point in the five-year, Fed-fueled recovery, it seems reasonable to expect most data to significantly exceed expectations rather than a mix of modest positives and ugly negatives.
On the second issue, investors are not expressing the kind of confidence that most had anticipated entering 2014. When the biggest winners of the last two tapering announcements (i.e., $85 billion down to $75 billion, $75 billion down to $65 billion) have been Treasury bonds, utility stocks, preferred shares, precious metals and gold miners, one is left wondering about Wall Street's conventional wisdom. Granted, five weeks does not a trend make.
That said, there are a number of exchange-traded fund indicators that deserve your attention at this moment.
1. Smallest Public Company Shares vs. Largest Public Company Shares. One of the long-running realities of the current bull market uptrend is that small-cap stocks have handily outperformed their larger company counterparts. Yet, since the mid-January peak for the overwhelming majority of broader market U.S. stock ETFs, funds like iShares Russell 2000 Small Cap (IWM) and iShares Microcap (IWC) have been noticeably weaker than S&P 500 proxies like iShares S&P 500 (IVV). One can see the development is the IWC:IVV price ratio below.