Trouble For Small Caps

What's (not) up with small cap stocks?

A glance at the market Tuesday showed the Dow Industrials down about 1 percent but the Russell 2000 Small Cap Index down more than 3 percent, causing many an observer to wonder what the heck is — or isn't — going on with the little guys.

There are at least three explanations:

- Economic worries typically push people towards larger, more predictable profits in times of uncertainty.

- Risk is back... and people's appetite for taking it is about the same as the need for another mouthful after a huge Thanksgiving dinner. I also note that the VIX was back above 70 again today for the first time this month; and up from a low of 45 on Election Day.

- And finally, sector weightings. The Russell 2000 has about 1.5 times the exposure to financials and 1/3 the exposure to energy as the S&P 500 does — exactly opposite of where you'd want to be today.

My Harvard-educated friend and colleague Melissa Lee points out a fourth reason: hedge fund ownership. Hedgies own an estimated 13% of small caps — and only 10% of the S&P 500.

CNBC's Companies/Stocks in the News:

General Motors

Ford Motor


General Electric