CHART OF THE DAY: The Japanese Mothers Aren't Looking So Hot Anymore

Thought the 20% drop from the May 22 peak in the Japanese stock market was bad?

Wait until you see what’s happened to the Japanese Mothers, an index of small-cap stocks that surged as the Japan rally took hold in late 2012 and early 2013.

Naturally, the faster they rise, the harder they fall.

The Mothers actually peaked on May 20, two days before the rest of the market, but since then, the small-cap index is down a staggering 47%.

“Buyer beware: Investors are exposed to unproven business models amongst a plethora of small-cap names and somewhere that can prove explosive when hot money pours in,” says Miller Tabak Chief Economic Strategist Andrew Wilkinson. “And the flip-side to any fast-money driven explosion is a cataclysmic decline as neurotic investors scramble for their money back.”

Wilkinson doesn’t necessarily see the big decline in the Mothers index since May 20 as much of a warning, though.

“The Mothers index on a year-over-year basis had advanced by 207% in May and now remains 76% higher than June 2012,” says Wilkinson. “And so while you might be forgiven for thinking that this volatile index is a canary in the coalmine, perhaps its behaviour is no different than a dash back to cash as investors recognise the need to bank gains before they are all gone.”

japanese mothers indexPercentage performance of the Japanese Mothers index of small-cap stocks (rebased to May 20 peak) and the Nikkei 225 (rebased to May 22 peak).

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