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Trader Q&A: Can Small Cap Stocks Predict the Market?

Schwab's Trading Services Team covers how the small caps market can give traders an indication of what to expect in the market.

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[John] All right. Corey from New York wants to know, "Are small caps sending a warning about the market?" Okay. Well, small caps sometimes--if there is some impending weakness in the market, sometimes they'll be the first to show weakness. Today, you know, we're pretty flat in the market today. Russell 2000 is one of the small-cap indices. The Russell 2000 actually is up today. And it's up more than the other indexes. That's a very short-term view. But right now, maybe the Russell 2000--because small caps are more risky typically over the long haul than large caps, they can be an indication that people might be willing to accept a little more risk in the market. And that might be a short-term bullish indicator.

[Randy] Yeah. I think that's exactly right. Small caps have a tendency to be a little bit more volatile, a little bit more risky. I do know that, in a general sense, that there has been a little more bullishness in small caps lately than there has been in previous months. And again, I would go back to what I was saying previously, which is, while we may see some short-term turmoil here in the next few weeks, the long-term outlook is generally pretty good. I think--you know, if you're looking for small caps--again, keep in mind, you're going to take a little bit more risk involved in small caps. But the small-cap market has been doing quite well. And the expectation from the general analyst community right now is fairly bullish, I think, still in small caps. Yeah.

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