The stock correction that seemingly everyone has been waiting for since late 2012 has failed to materialize as the Dow Jones Industrial Average simply continues to grind higher. However, U.S. small-cap stocks were noticeably weaker than the Dow on Monday and will give investors a warning signal if this trend continues.
The iShares Russell 2000 (NYSEArca: IWM) dropped 1% on the first day of the new quarter but the SPDR Dow Jones Industrial Average ETF (NYSEArca: DIA) was slightly in the green at last check.
The divergence caught the attention of technical analysts who watch the performance of small-cap ETFs as a gauge for risk appetite in markets, partly because they are more volatile. When small caps are leading the market it’s often a sign that investors are willing to take on more risk in their portfolios.
“Small-cap stocks tend to be more volatile due to narrower economic moats and a greater sensitivity to macroeconomic risks,” says Morningstar analyst Michael Rawson in a report on IWM, the small-cap ETF.