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How Serious Is the Small Caps’ Breakdown?

A sell signal was triggered as the Russell 2000 closed below its 200-day moving average


Stocks sold off Tuesday as small-cap, high-growth stocks continued a slide that began early in March and dragged even the big-cap stocks lower. The S&P 500 fell 0.9% with 9 of its 10 sectors in the red. The Nasdaq fell 1.4%, and the Russell 2000 dropped 1.6%. Small caps are off 4.8% for the year.

Twitter (TWTR) was slammed with a 17.8% loss on heavy volume. Facebook (FB) fell 4.4%, and (AMZN) lost 4.1%. The iShares Nasdaq Biotechnology (IBB) dropped 1.7%.

Treasury yields continued to fall as investors rushed to safety. The 10-year Treasury fell to 2.595% from 2.611% on Monday.

At Tuesday’s close, the Dow Jones Industrial Average fell 130 points to 16,401, the S&P 500 lost 17 points at 1,868, and the Nasdaq was pummeled for 57 points at 4,081. The NYSE traded total volume of 3.3 billion shares, and the Nasdaq crossed 1.9 billion. On the Big Board, decliners outpaced advancers by 2.2-to-1, but on the Nasdaq, there were 3.6 times more decliners than advancers.

SPX Chart
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Chart Key

After running to a new high in March, the S&P 500 is finding it rough going with support at 1,864, just 3-4 points below Tuesday’s close. Support is provided by the conjunction of the 20-day and 50-day moving averages. But MACD is curling down, so it is likely that the support band at 1,813 to 1,850 will be tested.

RUT Chart
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Small-cap stocks, represented by the Russell 2000, have been lagging since just after making a new high on March 3. A sell signal was triggered Tuesday, as the index closed below its 200-day moving average following a break last week through its intermediate trendline.

Furthermore, MACD flashed a bear market sell signal. This alone should wipe out more of the high-fliers as P/E ratios in that sector will no doubt contract.

Conclusion: With a serious breakdown of the Russell 2000, the bifurcation first mentioned in the April 21 Daily Market Outlook has widened. This significant diversion, though serious for the stocks in the index, has so far only had a mild impact on the Dow industrials and S&P 500. And even the Nasdaq is not yet close to breaking its 200-day moving average.

Nevertheless, the impact of a split market has slowed the Dow and S&P 500, and it will probably lead to a flat period of price volatility in those indices. However, their patterns remain bullish, and as long as the S&P 500 holds above its support at 1,850, the divergence should be used to accumulate bargain-basement quality stocks.

But daily and weekly traders should revert to taking either side of the market depending on overbought/oversold hourly parameters like the short-term McClellan oscillator and other trading indicators provided by most brokers.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.

Article printed from InvestorPlace Media,

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