Healthy second-quarter results from technology and banks are helping to drive buying in stocks. On Tuesday, the S&P 500 traded at an intraday record and is again looking toward 2,000, while the blue-chip DOW is edging toward another record.
While we are hearing about how the S&P 500 will break 2,000 and the DOW will reach 20,000, we are not hearing much about small-cap stocks, which have been under some pressure this year after leading the pack in 2013.
The Russell 2000 is struggling after failing to hold above 1,200 on two occasions; it’s currently down about 0.66% this year and 4.6% from its record.
Chart courtesy of www.StockCharts.com
I recently read how the failure of the Russell 2000 to follow the broader stock market higher is a red flag that could warn of a pending correction in the stock market.
Now, while small-cap stocks are probably the most vulnerable to selling at this time, I don’t feel that it’s time to simply ignore this high-beta growth group and focus solely on big-cap stocks.
My thinking is that investors are simply dumping some risk from their portfolio after recording strong returns in 2013. It’s not that small-cap stocks are inferior to the S&P 500 companies. In fact, as long as the economy continues to grow, small-cap stocks will fare well.
You just need to have some patience and think longer-term, as some of these small companies will become big companies. Case in point: I highlighted touchscreen technology provider Synaptics Incorporated (NASDAQ/SYNA) in October 2013, when the stock was a small-cap at around $46.00. The stock has since nearly doubled to the $84.00 level and is looking good.
The reality is that you need to keep an eye on small-cap stocks, as this is where many of the big gainers will be and from which the big companies first began.
Buying small-cap stocks on stock market weakness, which we are seeing so far this year with this group, will pay big dividends going forward.
At the same time, you also have to take some profits off the table on your big winners, so you can avoid a potential correction lower.
Small-cap stocks entail added risk, but the reward is what could really pay off for your portfolio as far as the total expected return. You just need to be diversified as far as market capitalization and sectors so that the drop of just one stock does not significantly impact your portfolio.
I view small-cap weakness as a buying opportunity, as the valuations tend to be more attractive and worth a look for aggressive investors.