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

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... http://stks.co/d0Xv6

? 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

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