Small Caps Have Dandruff

How do I know this?   The Russell 2000’s head and shoulders just hit my Bloomberg.  


Apparently the malady is contagious, as it seems the NASDAQ has caught it as well:


Now I’m no chartist, but there seems to be some pretty clear support and resistance areas in this classic topping pattern.

Yet, the phenomenon seems isolated to the small caps (Russell 2k) and generally younger companies (NASDAQ).  As the chart below illustrates, there has recently been significant divergence between the smalls and the bigs (S&P 500).  The top chart compares the two indexes while the bottom shows the direction and magnitude of the spread.


A chart of the NASDAQ vs. S&P looks nearly identical, so I omitted it.

These signals by themselves may not be too troubling.  But combined with the momentum stock beat-down, the retail stock beat-down, the bio-tech beat-down, the 10-year Treasury yield beat-down, and a flattening yield curve…

We’re not in the business of predicting short term market direction.  We are in the business, however, of allocating capital.  And while noisy indicators may or may not be precursors of pending market problems, relative value is looking a whole lot better than long beta from where I sit.  – LL