A lot of risk came off the table last week as investors reacted to a multitude of geopolitical events. There were flare ups around the globe, from Israel and Hamas, to the Ukraine, and the situation in Iraq continues to be a cause for concern. Last week, Europe as also back in the news as it appears Portugal’s biggest bank, Banco Espiritu Santo, is on the verge of collapse. As a result, gold, which I view as a “turmoil” indicator rose last week and investors also piled into another safe haven, U.S. treasury bonds. Gold (GLD) was up 1.47% for the week and U.S. treasury bonds (TLT) rose 2.62%. And the yield on the 10 year treasury also declined .13% last week from 2.65% to 2.52%.
With all the turmoil in the world, it is really no wonder than gold is moving higher and high-risk stocks are going down. Specifically, U.S. small cap stocks were hit the hardest with the S&P 600 Smallcap Index down a whopping 3.67%. Small caps are a proxy for the high risk, aggressive growth area of the market. After being up almost 40% last year, small caps are now FLAT for the year. Looking at the chart below, you can see the sharp small cap sell-off back in March/April, then a rebound, another sell-off, another rebound, and now another sell-off. At some point, small caps will either break out to the upside like they did last year, or they will being to rollover.
Aggressive growth stocks lead the overall market. So whatever happens with small cap stocks will be a strong indicator if this bull market still has some room to run, or if it has exhausted itself. If the S&P 600 Smallcap Index (IJT) were to break below $108, a key level of support, then I would become really concerned about the durability of this bull market. After all, the bull market is now five years and four months old and will not last forever. On the other hand, if this small cap index breaks above $124 then the bull market should continue higher.
Again, here is a key range of numbers to keep an eye on: $108 - $124.
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