U.S. stocks - Small-caps show promise amid Russell correction - Janney

By Ryan Vlastelica

NEW YORK (Reuters) - Small-cap shares fell Thursday, with the Russell 2000 dropping 1.6 percent to re-enter correction territory, suggesting the index could soon start to outperform, Janney Capital Markets said in a note to clients.

The Russell index of small-cap shares has been volatile of late, pressured by concerns over global economic growth as investors move to larger names that are deemed more stable.

The Russell is down 7.3 percent thus far in 2014, compared with a gain of 5.7 percent in the S&P 100 index of mega-cap companies. The S&P 500 is up 5.3 percent year-to-date.

Janney said the weakness in small-cap names could spread throughout the market, and that by the time large-cap shares turn, the Russell will be close to rebounding.

"Small-cap stocks typically fall first, capitulate first, and reverse first while large-caps lag behind in the process as a 'safe haven.' Once investors completely throw in the towel by divesting themselves of all stocks ... a majority of small-cap names will have already 'capitulated' and reversed higher," it wrote. "This implies that while we may see more corrective action over the short-run, the bottoming process is likely underway."

The firm noted that while the Russell was in correction territory, defined as a 10 percent drop from recent highs, more than half its components were in bear market territory - down 20 percent from a peak. Only 8 percent of S&P 500 components were in bear market territory, Janney wrote.

(Editing by Bernadette Baum)