A Small-Cap Disconnect

It’s getting weird out there.

Futures are in rally mode early this morning after the broad market took a small hit yesterday. Blue chips are doing just fine. Everything else? Meh.

Meanwhile, analysts have already seen their year-end price targets come and go. In fact, stocks are trading closer to their price estimates today than any time in at least seven years, according to Bloomberg.

You can twist this information any way you choose. If you’re feeling pessimistic, it’s a sign that the market is too hot. If you believe stocks have room to run, you can blame analysts for being too slow to react.

Of course, the truth lies somewhere in between…

No one knows how to handle this market. Analysts can’t raise their guesses. They’re paralyzed. To them, the wall of worry is just too high. Europe continues to circle the drain. A young, reckless dictator in North Korea desperately wants the world’s attention. And stocks are topping all-time highs.

So we’re fed generic reports advising caution. They write about “economic headwinds” and other cop-outs. The research is sterilized speculation masquerading as investing advice.

Fortunately, the market is always offering subtle and not-so-subtle clues to anyone willing to listen.

Yesterday, the Russell 2000 made its presence felt. While larger stocks barely budged, the small-cap index fell through the floor. By the end of the day, the Russell was off more than 1.3%– faring far worse than the Dow and the S&P…

High-flying small-caps are coming back to Earth. After consolidating for the past couple of weeks with the broad market, the Russell is flirting with short-term support.

This mini-breakdown jibes perfectly with the defensive trade I discussed yesterday. Healthcare, utilities and consumer staples are hot. Small-caps have been cast aside. That tells us to tread carefully.

You don’t have to sell everything and hide. But now is not the time to chase the high-flyers. Take profits on your momentum plays. And stick with the defensive names for now…

Greg Guenthner
for The Daily Reckoning