When Will the Bull Market End? Keep Your Eye on the Small-Caps

NEW YORK (TheStreet) --A lot of risk came off the table last week as investors reacted to a multitude of geopolitical events.

There were flare-ups around the globe, from Israel and Hamas to Ukraine; the situation in Iraq continues to be a cause for concern. Last week, Europe was also back in the news when Portugal's biggest bank, Banco Espiritu Santo, appeared to be on the verge of collapse.

What to Expect Next: A Double Whammy of High Unemployment, Inflation

Google Internet Ad Assault Still Hurting Yahoo!, Bing and Content Publishers

As a result, gold, which I view as a "turmoil" indicator, rose last week and investors also piled into another safe haven, U.S. Treasury bonds. The exchange-traded fund proxy SPDR Gold Trust (GLD) was up 1.47% for the week and iShares Barclays 20 Year+ Treasury Bond  (TLT) rose 2.62%. The yield on the 10-year Treasury also declined last week to 2.52% from 2.65%.

Data from Best Stocks Now App

With all the turmoil in the world, it is really no wonder than gold is moving higher and high-risk stocks are going down. Specifically, U.S. small-cap stocks were hit the hardest, with the S&P 600 Smallcap Index down a whopping 3.67%.

Small-caps are a proxy for the high-risk, aggressive-growth area of the market. After being up almost 40% last year, small-caps are now flat for the year.

Looking at the chart below, you can see the sharp small-cap selloff back in March/April, then a rebound, another selloff, another rebound and now another selloff. At some point, small-caps will either break out to the upside asthey did last year or they will being to roll over.

Aggressive growth stocks lead the overall market. So whatever happens with small cap stocks will be a strong indicator if this bull market still has some room to run, or if it has exhausted itself. If the S&P 600 Smallcap Index (IJT) were to break below $108, a key level of support, then I would become really concerned about the durability of this bull market. After all, the bull market is now five years and four months old and will not last forever. On the other hand, if this small-cap index breaks above $124 then the bull market should continue higher.

Again, here is a key range of numbers to keep an eye on: $108 to $124.

As of last Friday's close, the S&P 600 was at $117.64. This is right smack dab in the middle of this range. In other words, the aggressive growth area of the market is in neutral territory.

As you can see from the five-year chart above, small-caps have entered into a period of narrow consolidation. The ultimate direction of small-caps will depend on the results of the current earnings season and whether or not the turmoil in the world I described stabilizes or gets worse.

So when will the current bull market end? Keep your eyes on the small-caps for clues.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

More from Opinion

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

AAP Exclusive: Cramer Says The President is No Longer on the Side of the Bulls

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

Why It Makes Perfect Sense for Netflix and Amazon to Buy Up Movie Theaters

2 More Reasons to Sell All Your Stocks and Run Away

2 More Reasons to Sell All Your Stocks and Run Away

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Sean Hannity's Link to Trump Lawyer Raises Questions: Doug Kass Insider

Netflix Blowout Earnings Remind Investors of One Thing: This Company Is a Beast

Netflix Blowout Earnings Remind Investors of One Thing: This Company Is a Beast