Why are small cap stocks oversold?

[Lawrence McOchillo]

Why are the small cap stocks in the Russell 2000 more oversold than the large caps in the S&P 500?

[Simon Mugo]

Thanks for your question Lawrence, the main reason why the Russell 2000 small cap index is more oversold as compared to the S&P 500 is because small cap companies are generally regarded as being less financially stable than the large and medium cap stocks that make up the S&P 500 index. The same is true for stocks in the Dow Jones Indurial Average, which is composed of 30 of the largest American companies, which are regarded as being some of the most stable US companies.

However, not all small cap companies have recorded significant declines this year given that some of the top gainers this year have been small biotechnology stocks. As a trader, you can find excellent trading opportunities in individual stocks as opposed to buying and holding an index or an ETF. We provide a weekly watchlist of stocks that present great trading setups and you can sign up to receive the watchlist for free on this site.