The New York Times has come along with a novel theory. Small cap stocks will be the leaders as the market comes out of its current funk. The paper writes "Despite all the bad news surrounding record-high oil prices, mounting job losses, and continuing troubles in housing, the Russell 2000 index of small stocks has soared 12.7 percent since mid-March."
All theories have a counter-theory. Small cap stocks are not taking the market anywhere.
One of the reasons that the Russell has done well is that it has no large bank or financial stocks in it like the S&P 500 and Dow do. The Dow has too many troubled companies in it to be doing well, with Citigroup (NYSE: C) and General Motors (NYSE: GM) as two examples.
It is not hard to argue that small cap stocks will have a sharp sell-off in the second half. Their access to credit for expansion is modest because they usually do not have the balance sheets to support big borrowing. The customers are just as likely to be hurt by a recession as the customers at big companies.
The move up in the Russell is nothing more than a sucker rally.
Douglas A. McIntyre is an editor at 247wallst.com.
Warren Buffett, tells us more!
Oil has dropped $13, so gasoline should drop 30 cents, Americans hope
Wal-Mart's new Supermercado concept could be huge
