March 26, 2012 - Does Bernanke's Speech Mean the Risk Trade is On? - By Elliott Wave International
In a speech he gave before the stock market's opening bell, Fed Chairman Ben Bernanke today hinted at the possibility of more quantitative easing.
As prices leaped out of the starting gate, the NASDAQ hovers near a multi-year high and the S&P 500 at levels not seen since 2008.
Does Bernanke's comments mean the risk trade is back on?
Well, a single speech is one thing; the trend is quite another.
A look at the performance of small-capitalization stocks is one way to tell whether investors are in the mood for risk taking.
These stocks generally have a higher beta (more volatility) than the broad market. So when investors are embracing risk, they're more likely to buy the higher beta indexes. Conversely, they do the opposite when shunning risk.
Please take a look at the chart from our March 8 Short Term Update:
The stocks of smaller companies generally have far fewer shares outstanding than their blue chip brethren. So when investors pile in (or out) of a small-cap stock, the share price can move far and fast. The market value of some companies is so small that they're called micro-cap or even penny stocks.
As an example, TASER International was a penny stock in October 2002. The company makes taser stun-guns. As word of its popularity among police departments spread, investors piled into the stock.
The price soared 10,567 percent from October 2002 to December 2004. But there's another side to the story -- a downside. Those who bought in December 2004 watched in horror as their investment lost 83 percent just ten months later.
Of course, not every small cap stock has such dramatic percentage swings. But the point is: investors who ignore the trend and view Bernanke's speech as a risk-trade signal may be setting themselves up for the "other side" of risk-taking.
Our analysis is based on the market's price pattern, sentiment and momentum -- not on comments by the Fed Chairman.
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