by Chris Becker
Last night’s 0.8% fall on the US S&P500 index hid a greater down move on the small-cap biased Russell 2000, losing 1.5% with more than half of the stocks below the closely watched 200 day moving average.
Is this a sign the US bull market is over? Not quite – but the divergence between big cap and small cap stocks is growing giving some pause to the breadth of the market move as absent volatility starts to raise its ugly head.
The CBOE Volatility Index gained over 13% to 13.69, a one-week high. This comes on the back of a large drop in monthly volatility, but we’re nowhere near levels required for a breakdown.
More from Bloomberg:
There’s a good chance U.S. equities will decline over the next few weeks, based on the market’s deteriorating breadth, according to a research report from Jonathan Krinsky, a technical strategist at MKM Partners.
The last time so few companies in the Russell 2000 helped push the gauge to an intraday high was March 24, 2000, his report said. The index dropped 1 percent today.
“There are enough warning signs to suggest at least a modest pullback,” Krinsky said in the note. “We think some seasonal weakness into early October makes sense.”
“The market is weaker because of small caps,” Matt Maley, an equity strategist at Miller Tabak & Co LLC in Newton, Massachusetts, said in a phone interview. “When you combine this move in the Russell 2000 with the pickup in volatility in other markets, that’s a big concern.”
A bull market reliant upon ever expanding stimulus does not end well – ask the Japanese. But like shorting Japanese bond holders, who wants to stand in the way of this bull?
“People are looking for an excuse to knock the market back down a little bit,” Donald Selkin, chief market strategist for New York-based National Securities Corp., which oversees about $3 billion, said in a phone interview. “The internals for the market are horrible today. Maybe the feeling is that we might finally be ready for a more serious down move.”
Is Alibaba’s IPO the excuse? The staggeringly overvalued company – basically a conglomerate version of the dot-com boom of 2001 – lost 4.3% last night as underwriters surged to find some support in the stock amid its stellar IPO (nearly $22 billion raised and spiking nearly 40% on issue).
“With Alibaba, people are looking at that as a top in the market,” Patrick Spencer, head of U.S. equity sales at Robert W. Baird & Co. in London, said. “I still feel we are in a ‘Goldilocks’ environment with an accommodative Fed, huge buybacks, and another strong earnings-announcement season shortly.”
Indeed, a new permanent plateau?
For those who don’t care about forecasts and want some protection, a potential pairs trade is long S&P/short Russell as the latter is likely to suffer outsized falls in any correction ahead.
Or wait for the inevitable buy the dip?