MorningWord 10/31/13: Prior to the FOMC’s rate decision yesterday, major U.S. equity indices were in a fairly familiar place in the morning, at new or matched all time highs. As Enis detailed in his MacroWrap earlier, the statement was viewed by market participants as ever so slightly more hawkish than most had expected, and thus the weakness in equities & bonds and giving the dollar a bounce.
Prior to the announcement there was a fairly interesting divergence though between large cap and small caps. The Russell 2000 (RTY) spent all but the opening 10 minutes in the red and after the initial “we don’t know what the hell to do pop” the RTY saw a fairly violent leg down shortly after the FOMC statement was released at 2pm.
The small cap sector, usually perceived as a riskier asset class than the large caps in the S&P 500, can be a decent barometer for investor’s appetite for risk taking in the U.S. equity markets. As Enis detailed in his Macro Wrap on Monday. It should not be lost on market participants that on a newsworthy day like yesterday the RTY was down 1.39% vs the SPX down 0.49%.
Additionally, this comes on a day that saw the third fairly significant reversal day in the last month in the bulk of the high-flying momentum names that have been the poster-children for the rally since the spring – TSLA, NFLX, LNKD & the XBI (S&P Biotech ETF). The price action in all of these was downright bad, breaching important technical support levels, and all on higher than avg volume and for all intents and purposes confirming the relative weakness in the RTY. So is the Russell telling us anything?
The broad market has been very resilient in 2013 because each new bout of weakness on the part of market leaders has been met with a new stable of stocks taking up the call for new leadership. As the prior leaders falter, we’ll be on the lookout for whether other names can pick up the slack. But in the meantime, the weakness in small caps and momo names is certainly a chink in the bulls’ armor.