Small Caps And Tech Must Lead For The August 2012 Rally To Continue:
The market may be taking a breather in the short run after several days of consolidation and rangebound trading. U.S. equities broke to the upside at last week but many investors are still skeptical of this rally and are underweight stocks. For the rally to continue, sectors that were previously out of favor need to be the new leaders. Tech, and small caps have slowly caught up to the rest of the market but haven’t shown leadership that would suggest the rally is in ‘full steam ahead’ mode.
We are watching small caps and technology to see if risk is rotating. If investors are willing to assume more risk, they may be less interested in holding bonds and more willing to purchase low paying dividend stocks. A true rally exists when traders and investors are more focused on price as opposed to yield. The bond market has been an good example of this for the last few years as it has recently been paying a negative dividend. The IWM small cap index above $83 could be a sign more upward momentum is in this rally.