Prime Minister Ariel Sharon's sudden disappearance from the political scene blipped on the Tel Aviv Stock Exchange, but no more than that. Blue chips are again approaching record heights and the smallcaps have passed them.

The buzz for months has been "second-tier stocks". The reforms in the capital market and the competition over returns has whetted the institutionals' appetite for assets that, in a boom market, stand to provide better returns. And almost all investment firms are suddenly recommending smallcaps, stocks traded in the "Yeter" broad market.

The year 2006 will be the year of the Yeter, they say. The theory is that as an economy rallies, the upswing starts in the government bond market, then reaches corporate bonds. From there it moves onto the big-cap stocks and finally trickles down to the smallcaps.

Smallcaps are easily moved, a lot, by isolated events. A millionaire buying in, or data that Internet advertising is rising, or signs of a recovery in real estate can lift a share price by 10% in a day. But there are plenty of image games and bluffs, too: minnows announcing an anticipated offering, or a new deal, anything to interest the press and attract attention that will lift their share price. Companies registering on nobody's radar at all suddenly start carpet-bombing the market with weekly announcements; they hire PR hacks who bombard the press with useless nuggets of information.

In the Little Prince (that great classic by Antoine de Saint Exupéry), the lad explains that weeds must be pulled up when small, lets they turn into threatening great baobabs.  "But when it is a bad plant, one must destroy it as soon as possible, the very first instant that one recognizes it," the prince explains, and goes on:

"It is a question of discipline? When you've finished your own toilet in the morning, then it is time to attend to the toilet of your planet, just so, with the greatest care. You must see to it that you pull up regularly all the baobabs, at the very first moment when they can be distinguished from the rosebushes which they resemble so closely in their earliest youth."

You too, investor, should learn to distinguish between good and bad seeds, and in any case, think twice before leaping onto the galloping Yeter. In the short run these stocks may produce handsome returns, but remember the high risk of this bandwagon. One of its wheels could well fall off in mid-dash, and here, timing is key. Getting out in time matters more with a smallcap than say it would with an investment in Bank Hapoalim, because of the volatility of the share price. Getting the timing wrong could cost you dearly.

Here are a few reasons to think twice and thrice before getting into Yeter stocks.

1. The post-Bachar capital market

From a rabble of small and medium-sized institutional investors and companies, the market is settling down as a limited clique of players, that will include five to seven insurance companies and about the same number of big investment firms. More than ever before it makes zero sense for these bodies, which manage billions of other people's money, to focus on smallcaps, most of which had never been on the manager's agenda before. Their low liquidity, and mainly their marginal potential contribution to a giant institutional's returns, do not justify messing around with them.

Just last week DS, which manages NIS 6 billion assets in provident funds, proudly announced that it had earned tens of percent on Walla stock within a few days. Walla is a successful Internet portal company: the main problem is that beyond DS' profit being on paper only, the increase to its returns on its giant portfolio will amount to oh about 0.01%. The significance of Markstone (with its more than NIS 50 billion under management) earning a million shekels on some sideshow stock is nonexistent.

2. Exposure to foreign markets and tax parity.

In the last year, Israelis have been investing more and more overseas. It makes sense, too. It has begun with mutual funds but there is no reason for major and minor Israeli investors to diversify their portfolio with foreign securities, even little ones. True, foreign markets are not innocent of dogs, but why should a mighty Israeli institutional investor or some small investor from Netanya choose a smallcap from the Yeter index when he can buy a "Yeter" stock overseas, which is far more liquid, given that he can pay the same tax on gains?

3. The public float.

Unlike in the U.S., over in Israel the owners of a company typically own 80% or more of its shares. There is very little floating merchandise and that isn't the only problem at these quasi-private companies. Their owners at worst milk them dry and at best, take handsome rewards for their services in the form of high salaries, perks and bonuses. When the share price is rising it's one thing, but in a bear market the public will be standing there with worthless shares and the company owners will be sitting in their comfortable seats.

4. Changing sentiment.

Once upon a time, in a bull market, every taxi driver had an opinion about Isramco. Day traders clustered like flies around bank monitors tracking the market. Today the public isn't stampeding stocks, certainly not the smallcaps. If anything they go for the same blue chips that the foreigners like. The mutual funds sector tells the same story: funds specializing in broad-market Yeter stocks don't raise billions of shekels. Israelis own less stock than people on average in other countries do. The public's direct holding, not via provident and mutual funds, is negligible.

5. Worst of all: No liquidity.

What the TASE calls a broad-market, or Yeter, stock wouldn't make the grade in foreign markets. In the U.S. a smallcap has a market cap of $250 million to a billion dollars. Here some of the smallcaps are worth a few tens of millions of shekels and a few are worth just a few million.

Low liquidity becomes an acute problem when the market turns nasty. When the dive comes, the funds specializing in Yeter stocks have to contend with a massive flight of depositors. Their investment committees stampede for the door.

When everybody's jamming the doorway, disaster can ensue.

Present trading volumes in some Yeter stocks are looking perky of late. But on less active days, the chart of a typical Yeter stock can look like an EKG of a corpse.