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Small Caps Face Strong Headwinds: Expert

Due to increasing U.S. growth concerns and the weakening breadth of demand for equities, small caps face strong headwinds, Gerry Fowler, global head of equity & derivative strategy at BNP Paribas, told CNBC.

“The complacency or inaction of investors is permeating everything from small capsthrough to volatility strategies and might be creating some ‘air-pockets’ — a quick move down without finding much resistance straight away — for September,” Fowler said.

Small caps are underperforming at the moment which is a warning sign of decreasing market breadth — the market strength according to the number of stocks that advance or decline in a particular trading — at the moment, according to Fowler.

The analyst also said he expects market rallies to become less broad and more specific as small caps have been flat to down in the last month while the large caps are up.

Because of low market breadth fewer stocks are holding the market index at the current level, he said.

BNP Paribas last month highlighted the outperformance of small caps versus large caps as a good opportunity, but since then the small cap index Russell 2000has underperformed by 5-6 percent versus the S&P 500 Index and by 7-8 percent versus the DAX , according to Fowler, which “really shows a lot less conviction in the small caps that tend to outperform when people are confident,” he said.

Since the small cap Russell 2000 reached a high on July 3, both the S&P 500 and the Nasdaq 100 large cap indexes have continued to advance but the Russell 2000 index fell 1.4 percent, underperforming all other major U.S. stock indices, except the Russell microcap index.