Risky Business Makes a Comeback

2012 featured more of the same from skittish investors.

They shunned risk. Instead, anyone interested in equities stuck to blue chips. Stocks paying a decent dividend received plenty of attention, while smaller companies were virtually ignored. Hesitant, fearful buying defined the collective attitude toward equities.

But something changed after the market began moving higher three months ago…

For most of 2012, small-caps and large stocks slogged through the ups and downs within spitting distance of each other. But since the market began to move off its November bottom, the Russell 2000 small-cap index has outpaced the Dow Jones Industrial Average by a wide margin…

Small Stocks vs. The Dow

Appetite for risk has abruptly changed. The Russell is up an impressive 18% since its November lows, while the Dow has risen about 11.5% during the same timeframe. Even as stocks consolidate this week, smaller names have not given up much ground to the big kids.

The last time we saw similar small-cap outperformance was in September 2010. In that case, a strong Russell helped propel a broad market rally lasting more than 10 months.

When investors show they are willing to take chances on some of the smaller, more volatile names on the market, stocks will continue higher.

Pay close attention to the Russell as stocks consolidate this week. If it fails to hold its ground, you’ll have an early signal to take profits…