SMALL CAP TROUBLE COULD MEAN MARKET TROUBLE

SMALL CAP TROUBLE COULD MEAN MARKET TROUBLE

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Key Numbers from Steelcase (NYSE:SCS) 4Q16 Earnings Report

Investors are pulling out of small-cap stocks. Infact investors pulled the most amount of money from small-caps in a decade which is very alarming. This came a month right after small cap ETF’s ,such as the RUSSELL 2000,  roared to an all time high. So what is going on.

When looking at the RUSSELL 2000 (RUT:INDEX) we see that there has been a dip from last month’s high of $1424. Now the Index is at $1380 after rising +$22(+1.6%) to arrive at today’s $1380. The changes may not seem all that drastic when looking at it this way. However when looking at the iShares Russell 2000 ETF Fund Flow we can see that the outflows are now currently at a 10 year low. The amount of money that has flowed out of the Fund is an estimate of around -$3.5 billion; a staggering amount considering the Trump post election stock rally.

So this begs the question….

Where is the money now flowing into?

The simple answer is into large-cap. The post TRUMP election rally has really provided a big boost to major Indices; in some cases over 10% in a short time period. One would think that this boost would always spread consistently across all caps but in this case it’s not.

When comparing the Russell ETF against the S&P500 over the past they move almost in sync. However in the past ew weeks they have deviated to the point where I rise in the S&P only corresponds to a weaker rise in the Russell 2000. That means that most of the funds have left small caps and flowed into large caps.

In fact large caps are performing better than small cap overall. Most of the power movers on the S&P happen to be APPL, Alphabet, Facebook, Amazon and even Microsoft. Therefore it shouldn’t be surprising that these companies which are making consistent revenues are doing well.

So what does this mean?

It means a possible sell off is possibly on its way. It is not expected to be anywhere near 2008 but it will be unusually large. Andrew Brenner, head of international fixed income for National Alliance Capital Markets has said that “There’s some nervousness out there and people are staying in the most liquid stocks,” following up with “I think we’re getting ready for a much more significant correction.”

Therefore this sell off in small caps could be a signal for an acute correction yet to come.

Brenner also alluded that the hiccup is being caused because the market is waiting to see whether or not the reforms promised by the president will be accepted by congress. For now he heeds that investors look at the technical data and assess the risk; maybe even move your money to safe harbor and hold for now.