Stock markets continue to trade cautiously with swings in both directions, although the overriding bias is negative, with selling surfacing after major upside moves. The DOW had two straight 100-point declines last Monday and Tuesday prior to some buying on Thursday, as the barometer of blue-chip performance wavered subsequent to closing above 13,000.
In the housing market, a report was released that continued to paint a dismal picture with home foreclosures and late payments at a record for the first quarter. The declining wealth in the housing market will continue to impact consumer spending and economic growth.
There has been some optimism in the small-cap sector, as the Russell 2000 has rebounded and is showing decent technical strength at this point. After being down over eight percent, small- cap stocks have been on a revival streak, trending higher. They are currently leading the large-cap and technology issues this year with a marginal three-percent decline, compared to nearly six percent for technology stocks and over six percent for large-cap stocks. The rebound in small-cap stocks is driven by improved optimism that the U.S. economy may avert a recession this year.
My feeling is that small-cap stocks will continue to outperform in the longer term. 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, trading at $17.43 intraday on June 5 — up a remarkable 47% in about three months at an annualized return of about 188%. These types of situations occur more frequently than you may think, but you need to monitor the market closely on a daily basis.