Reply #95: Hedge Fund Alert: Long-expected small-cap correction may be at hand [View All]

[UpInArms]

http://www.marketwatch.com/News/Story/Story.aspx?dist=newsfinder&siteid=mktw&guid=%7B7B5E200B%2D2E79%2D4C97%2D9651%2D9F36054017F1%7D&symbol=

NEW YORK (MarketWatch) - The long-expected correction of the high-flying small-cap stock sector may finally be at hand and the trigger seems to be the withdrawal of hedge fund capital that is hurriedly making its way toward gold and other rallying commodities.

Citigroup analyst Albert Richards noted that the small cap Russell 2000 ($RUT 767.45, +2.91, +0.4% ) index ended April with a nearly flat result, closing down 0.1% on the month to lag the solid 1.2% gain registered by the large-cap S&P 500 ($SPX 1,314.53, +3.92, +0.3% ) . By contrast, for the entire first quarter the Russell 2000 shot up 14%, sharply exceeding the 3.7% increase posted by the S&P 500, and extending the surprisingly durable rally in small-cap stocks that began in October, 2002.

Last month's flat performance by small caps could mark the beginning of a period of weakness, said Prudential Equity Group chief small-cap analyst Steven DeSanctis, who believes small-cap valuations became too rich during the sector's three-and-a-half year rally.

DeSanctis noted that as of Monday, shares in the Russell 2000 were priced at 18.8 times their forward earnings, while stocks on the large-cap Russell 1000 ($RUI 716.36, +1.99, +0.3% ) traded at just 15.6 times their forward earnings.

Historically, such a large gap between the 2 indexes is a classic signal of an approaching correction, he said.

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