Small-capitalization stocks – companies with smaller total values calculated by multiplying the company’s stock price by the number of shares outstanding – tend to advance first in an economic recovery. They are therefore a leading indicator of the direction of the economy, and the broader market tends to follow their lead. Using the S&P 500 as a proxy for the broader market, we can compare the small-caps with the broader market in a chart, overlaying the Russell 2000 (small-cap index) with the S&P 500:
In this one-month cart, which shows the month of January 2013, we can clearly see that the small-caps (blue line) have rolled over and are about to cross down through the S&P 500 (orange line). If history serves, we should see the S&P 500 begin to roll over shortly and begin a correction.