The Dow Jones Industrial Average managed to close Friday with a gain of 61 points in wild see-saw action. However, small-cap exchange traded funds ended with steep losses in one sign the selling may not be over.
The iShares Russell 2000 (NYSEArca: IWM) lost nearly 2% on Friday and dropped almost 11% in this week’s sell-off.
It’s a worrying sign because small-cap stocks tend to underperform large, blue-chip companies when investors are worried about the economy. [Using Small-Cap ETF Relative Performance to Measure Risk]
The Dow clawed into positive territory Friday following reports the European Central Bank was ready to provide support to troubled bond markets in Italy and Spain.
“The market’s reaction to the news that the ECB is likely to buy Spanish and Italian bonds has been mediocre,” said Tarquin Coe, technical analyst at Investors Intelligence.
“Small caps continue to underperform today,” he wrote in a newsletter. “The ratio of the iShares Russell 2000 versus the SPDR S&P 500 ETF (NYSEArca: SPY) has confirmed a head-and-shoulders top and also violated a trendline drawn up from a November 2009 relative low. Further underperformance is forecast based on this technical breakdown.”
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.