Thursday, April 4, 2013

Russell 2000 vs S&P 500 Divergence: April Fool's Joke or Something Else?

Who’s laughing?  According to bespoekinvest while their daily performances will typically vary, generally speaking the S&P 500 and Russell 2000 move in the same direction.  If one trades higher, the other follows suit and vice versa.  Because of this, a lot of investors have sat up and taken notice of the recent divergence between the two.  While the S&P 500 traded up modestly on Monday and Tuesday, the Russell 2000 traded down nearly 2%.  Given the fact that the Russell 2000 has led the overall market higher, the recent divergence with the S&P 500 has been especially concerning.

So, is the Russell's recent negative divergence a warning sign of things to come for small caps and the broader market, or was the first two days of this week just the market's way of playing a cruel April Fool's joke?  Earlier today, we sent out a report to Bespoke Premium clients highlighting the five prior times in the last ten years where the S&P 500 and Russell 2000 saw similar divergences over a two-day period.   Yes, there have only been five other similar divergences! We then looked to see how each index performed over the following week and month.  While the one week results were mixed, the performance of both indices over the next month was, depending on your positioning, either clearly positive or negative....

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