While it's still uncertain whether the current correction will recover or deepen in the near term, MoneyShow's Tom Aspray makes a compelling case why investors should not sell their small-cap stocks and run just yet.
The stock market was able to stabilize Tuesday after Monday’s sharp slide, which was positive, and the futures are a bit higher early Wednesday. This is not enough yet to conclude that the market’s correction is already over.
For now, a broad trading range with a downside bias seems the most likely path over the near term. It would take a strong close above Monday’s early highs to suggest that the correction is already over.
In a recent Wall Street Journal article, “The Small-Cap Stock Trap,” it was pointed out that the Russell 2000 is up 19% since the November lows, versus just an 11% gain in the Dow Industrials. The author suggests that the recent strength of small-cap stocks may be trapping investors with higher risk.
As I noted yesterday, the iShares Russell 2000 Index (IWM) has already dropped almost 4% from its highs. However, from a technical standpoint, I do not think that the rally in small-cap stocks is over. A historical look at recent rallies in this area suggests that they should still be on your buy list during the market’s current correction.
Chart Analysis: On the weekly chart of the iShares Russell 2000 Index (IWM) that goes back to 2009, I have highlighted several periods of strength in small-cap stocks. The performance values are calculated from low to high, and therefore are high, as no one gets in at the low or out at the high.
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