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First Major Index Enters Bear Market

The Russell 2000Index , a gauge of the small-cap sector, officially entered a bear market Thursday, dropping more than 20% from its intraday high reached in late April.

“In an uncertain market, I’m going to stick with allocations to larger cap stocks before the small caps,” said Patty Edwards, founder of Storehouse Partners and a Fast Money trader. “Plus, generally speaking these are the companies that are less established, with smaller war chests and fewer reserves to tap in a bad economy.”

A jobs report today that showed fewer than expected private jobs created in Juneadded to mounting concerns that the US economy is headed toward a double-dip recession. Weaker-than-expected manufacturing data from China this week compounded fears that the whole global economy may be on a precipice. A further delay in the Senate vote on US financial regulation also added to the uncertain environment this week.

The Russell 2000, which contains companies with a median market value of $436 million, hit an intraday high of 745.95 on April 26 as expectations of a housing recovery increased and as regional banks rebounded on the stabilization of the financial system. It traded as low as 590.55 yesterday before rebounding into the close. The measure was down again today.

Small-cap stocks are considered riskier investments because they are more levered to any changes in the economy, liquidity and consumer credit. As these conditions improved over the last 12 months, the Russell 2000 outperformed the rest of the stock market, jumping more than 30 percent. The Russell 3000 Index , a broader measure containing the 1,000 largest stocks as well, increased about 20 percent.

The largest holdings in the Russell 2000 include Tupperware , Domtar , Polycom and Tempur Pedic .

Large-cap stocks, as measured by the S&P 500, have the most cash on hand ever right now, with 10% of their assets in short-term instruments, according to Goldman Sachs. They also have easier access to the capital markets if banks pullback on lending.

“It’s the ‘Karate Kid’ trade,” said Edwards. “Risk on. Risk off.”

For the best market insight, catch Fast Money each night at 5pm ET, and the Fast Money Halftime Report each afternoon at 12:30 ET on CNBC.

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Trader disclosure: On July 2, 2010, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s Fast Money were owned by the Fast Money traders: Adami Owns (AGU), (C), (GS), (INTC), (MSFT), (NUE), (BTU); Terranova Owns (FCX), (MON), (AGU), (KO), (XOM), (TEVA), (RDS.A), (GMCR), (UPL), (GS); Terranova is short gold; Terranova owns (GLD) July 123 puts; Terranova owns (GS) JULY 130 CALLS; Terranova owns (GS) JULY 135 CALLS; Najarian Owns (PFE); Najarian Owns (CELG); Grasso owns (ASTM), (ABK), (BAC), (BGP), (C), (CSCO), (DYN), (JPM), (LPX), (MO), (NDAQ), (PFE), (PRST)

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