Yep, just as scripted, stocks followed through on Wednesday's weakness today. Also as scripted, all it took was a brush of the 50-day moving average line (purple) at 1867 to stop the bleeding for the S&P 500. That's the third time in three weeks the S&P 500 index pulled a tad below the 50-day line and then reversed course; the bulls are clearly drawing a line in the sand there. Advertisement Today's Top 10 Penny Stocks - Free List Just released! This complimentary list will continuously rank today's top 10 stocks under $10 using MarketClub's technology and scanning tools. Show Me Today's Top 10 Penny Stocks List Advertisement So now what do we do? Same as before... nothing. See, while Thursday was a bearish day, the index is still just caught between a rock and a hard place. Until the S&P 500 breaks above 1896 or below 1867 for more than just a few minutes, there's nothing worth worrying about. And, I still peg the breakout/breakdown odds at right around 50/50. That's it. End of story. I know it's a brief analysis, but there's no point in saying something that wouldn't be helpful. I'd rather devote the time and space to something more meaningful for you. Small Cap Growth & Valuations You may recall a couple of days ago we had a discussion about Janet Yellen's opinion that certain pockets of small cap stocks were overvalued. We disagreed, pointing out how small caps - as a group - were actually fairly valued, and perhaps even undervalued considering the kind of earnings growth this segment of stocks was supposed to produce beginning in the current quarter. Well, that was only the first part of the discussion. Today's the second (and frankly better) part of the discussion that actually pins down where those pockets of overvalued small cap stocks may be. The information you're about to see is data we've showed you before - kind of recently too. The data deserves an updated look, however, especially since Yellen forced us to take this detailed look. The data is a look at the P/E ratios and earnings growth rates of the S&P 600's stocks, broken down into their individual sectors. It is what it is. Take a look at the P/E ratios. Just keep in mind that 2013's P/E levels are 100% actual, while 2014's P/E ratios are about 75% estimated and 25% actual. The pockets of overvalued small caps are - based on the data anyway - energy (which is not hard to believe), technology, telecom, and healthcare. Looking ahead, however, the only overvalued pockets are telecom and energy. Of course, as we've all seen before, sometimes strong growth is worth the high price. Which of these sectors have been hot (or cold) on the growth front, and what do their futures look like? Take a look at their earnings growth trends. Small cap technology stocks have been on a roll for a few years now, so 2014's big growth projection isn't out of line. Ditto for consumer staples. You also have to like the discretionary stocks. I have my doubts about small cap healthcare stocks doing as well as they're currently expected to do this year and next year, however, based in their history. [Most of that earnings growth is expected to be driven by small cap biotechs, who notoriously talk a big game but rarely walk the walk.] Honestly, the only problem areas I see are materials, and maybe healthcare, both of which are probably on the "too high" end of the P/E scale. Were those the areas Janet Yellen was talking about? Maybe. Or, maybe she was talking about technology stocks. Well, I have a theory about that.... I don't think Yellen had any specific sectors or clusters of small cap stocks in mind when she said it. I think it was a gut feeling she had, possibly/probably driven by a small cap stock or two that she was highly familiar with - maybe even owns it - and she extrapolated their excessive values to apply that opinion to the whole small cap enchilada. She sure wouldn't be the first public figure to voice a broad conclusion about a highly-specific and unique situation (and voice it for no real apparent reason). Now, I'm not saying there's not some truth to what Yellen was saying. I'm just saying, we can dissect the daylights out of what she said, and still come up with absolutely nothing. In fact, I think that's exactly what happened here. I'd like to think that the two tables above are more valuable to you than any off-the-cuff comment made by the Federal Reserve Chairperson. Anyway, the reason I wanted to slice and dice the small cap sliver of the market was because I got inspired by something John Monroe said in today's edition of the Elite Opportunity newsletter. He spoke at length about the ins and outs of trading small cap stocks, but a couple of things he wrote really stuck out to me as worth reiterating to you guys. Check it out. "When it comes to making a decision as to whether or not you should be trading something or investing in it, an excellent rule of thumb is only invest in those companies for the long haul who have proven or are proving they know how to make money and grow. It's a very simple rule that tends to be overlooked by some many individuals because when one decides to buy a particular issue, they often get caught up in all of the hoopla and editorial propaganda supporting the theory that the stock in question is going to become the next big thing, when in fact, most companies are never going to become the next big thing. Stocks go up and stock go down but it's those companies who have proven their ability to grow and make money who can sustain the worst and inevitably end up higher and higher over the years, despite any sort of major market volatility or setback. Small caps are more often than not, dating material. However, one should never shy away from small caps because they do provide the best returns in the markets on a short-term basis. The problem is small caps are also the most volatile of the bunch. It's important to remember no matter how promising a small cap looks on the surface, there will be a day, week or a month, whereby it's going to take a beating. That's just what most small caps do." John's exactly right, too, and his philosophy is one we try to remember every day at the site and here in this newsletter. But isn't a fundamental look at small cap sectors a long-term way of thinking, and explicitly the opposite of only "dating" a stock for a short period of time? Yeah, but it's not that simple. John also said "those companies who have proven their ability to grow and make money who can sustain the worst and inevitably end up higher and higher over the years, despite any sort of major market volatility or setback". There are plenty of small cap stocks that have more than proven themselves as long-term winners, and are capable of doling out long-term gains for shareholders. The hard part is finding them. It's worth the work though. Anyway, while we ferret out interesting small caps from time to time here in the newsletter, I think the Elite Opportunity team is about the best there is at uncovering hidden small cap gems. Monroe and his team are also the best there is when it comes to figuring out when it's time to be aggressive with small caps and be conservative with large caps. If you want a great lesson in how to spot those tidal market shifts, the EO is the way to go.... especially with the free two-week trial available to give John and his team a test drive. John's also got a good handle on the market too, and has named a technical ceiling we really haven't looked at or talked about yet. You may want to check that out for yourself. Here's how to get it, or cut and paste this link: https://www.smallcapnetwork.com/?vmpd_ckstr[click_track]=Newsletter&vmpd_ckstr_redirect=/pages/SCNEO/v1/ By the way, we got the second wave of inflation data for April today, along with last month's industrial productivity data. We're going to table that discussion until tomorrow, however, when we'll also hear April's housing starts and building permits figures. We're going to bundle it all up together and give it all to you in one shot. You're not going to want to miss it.