Stocks ended little changed on Friday, falling from
the record highs hit on Tuesday. Small-caps fell. The backtracking was caused
partly by a Federal Reserve announcement on Wednesday interpreted by investors
as inching up the small risk that the central bank will taper its bond-buying
stimulus next month.

Adding to such fears was economic data released on
Thursday (such as the Chicago Purchasing Managers index) that were stronger
than expected.

“Sometimes
in the market, good news is bad news,” says Andrew Ahrens, CEO of Ahrens
Investment Partners. A stronger economy should be good news for companies, but
the Fed’s easy-money policy has benefitted stocks enormously, and investors
fear the removal of the punch bowl. Ahrens believes that a December tapering
“isn’t in the cards, but if there is one, it would be an insignificant
amount.”

On the week, the Dow industrials rose 0.3%, or 45
points, to 15,615.55, but below the 15,680.35 record. The S&P 500 edged two
points, to 1761.64, down from a high of 1771.95. The NASDAQ fell 21 points or
0.5% to 3922.04.

While October was a good month for equities, what
might be worrisome, near term, is that small-caps, which have led this long
rally, underperformed significantly. The S&P 500’s total return last month
of 4.6% topped the 2.5% monthly return from the Russell 2000, which fell 2%
last week.

That’s not a particularly good sign for the short
term, says Leuthold Group CIO Douglas Ramsey. Market volatility and sentiment
measures, like put/call ratios, suggest a sharp jump in volatility and a
downward lurch in stock prices this month, adds the CIO, who’s shorting
the iShares Russell 2000 exchange-traded
fund (ticker: IWM).

Perhaps the only thing that dents our conviction in
a near-term downdraft is that everyone seems to think that the market is due
for a drop. Momentum is stronger than sentiment—until it’s not (Source:  Barrons Online).