Small Stocks Lead the Way (Down?)

Are small stocks breaking down?

We were looking over some small-cap stock charts earlier this week with a few other analysts in the office. It’s difficult to estimate how many stock charts pass across our monitors every week — but it’s safe to say the number is significant.

The smallest companies we research on the Nasdaq or Amex are all beginning to act in a very similar fashion. The charts all look like a variation of this:

Small Cap Trends
*The company name and share price have been redacted

Some are less dramatic — but the idea is the same. The smallest issues — with a few exceptions — peaked sometime in October. It’s becoming more obvious that the Nasdaq flagships — Apple, Google and the like — are keeping the index from pulling back.

Sure, the evidence is anecdotal. Nevertheless, it’s worth mentioning. We’ve said time and again that the smaller stocks have historically led the market out of recessions. And right now, we aren’t exactly thrilled where Wall Street’s smallest denizens are leading us.

However, now’s not the time to be hitting the panic button. It will take a much broader downturn to engulf our pennies. We just need to be ready to act if necessary.

The Daily Reckoning