Monitor Your Favorite Small-caps for an Entry Point

Stock markets continue to trade cautiously, with swings in both directions, although the overriding bias is negative, with selling surfacing in recent days, as stock markets threaten to move lower. The DOW lost 280 points on Wednesday after a 289-point gain on Monday. Prior to that, the DOW plummeted 355 points on the previous Thursday.

In the housing market, the current situation and outlook remain bleak, with record home foreclosures and late payments. The declining wealth in the housing market will continue to impact consumer spending and economic growth going forward.

There had been some optimism in the small-cap sector, as the Russell 2000 was near breakeven recently. However, with the recent selling, it is back down nearly eight percent, and it will be driven by the economic outlook. The same cannot be said for the over 15%-16% declines in the DOW and S&P 500, as well as the nearly 17% drop in the NASDAQ. Unless we see a major reversal, stocks are set to end lower this year for the first time since the bear market in 2002.

My feeling is that small-cap stocks will continue to outperform in the longer term. The historical statistics reflect this. The key for you as an investor or trader is to monitor a group of small-cap stocks that you like and wait to pick up or add to a position should the stock decline significantly.

An example of this a few months back was Brown Shoe Company, Inc. (NYSE/BWS), which fell to a 52-week low of $11.89 on March 17, but has since been trending higher. It traded as high as $18.00 thereafter, for a gain of over 50% on a bounce. These types of situations occur more frequently than you may think, but you need to monitor the market closely on a daily basis.