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Small cap stocks signaling market caution ahead of US election

Traders work on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters

Small-cap and tech stock performance is sending a caution signal for a market counting down to the U.S. presidential election, several analysts say.

"What I think you're seeing is a bit of rotation out of small-cap stocks and into large-cap stocks," said Peter Coleman, head trader at Convergex. "One of the reasons we think that's happening is because of uncertainty in the market" ahead of the Nov. 8 election and a potential Federal Reserve rate hike in December.

The Russell 2000 is among the biggest laggards this month, down more than 5 percent for October in its worst month since January and more than 6 percent below its all-time high. The other major U.S. indexes are also tracking for their worst month since January, but are only about 3 percent below their intraday records. 

"When combined with the technical picture for large-cap indexes, the small-cap breakdown is significant, in our view," analysts from Bespoke Investment Group said in a report. They also pointed out a break in a positive trend in the relative performance of the Russell 2000 and the S&P 500 that "signals underperformance for small cap stocks ahead."