The stark difference between large- and small-cap performance remains a thorn in the side of the bull market. This is also corroborated in the June-quarter earnings numbers thus far. In the meantime, as tech-led large-caps snapped back sharply last week, the ratio of VIX to VXV quickly transitioned from the green zone to the red.
 

The S&P 500 reached a new intraday high of 6427 on 31 July before coming under pressure to tick 6213 in the very next session, finishing with a weekly bearish engulfing candle. Equity bears had an opening but were unable to cash in on this, as the bulls took things under control right from the word go last week. The large cap index rallied 2.4 percent – the same amount by which it fell in the preceding week – to 6389, with Friday tagging 6395 intraday. This gives the bulls an opportunity to stage another breakout – this time at 6390s (Chart 1).

The S&P 500 has come a long way from its low of 4835 on 7 April, and it remains overbought. The daily Bollinger bands, in fact, continue to narrow; when this happens, a sharp move follows, regardless which way it goes. If the bears prevail, then they will be butting heads with the bulls at 6100s, which the index broke out of in late June and is yet to be tested in earnest.
 

The Russell 2000 is not as lucky. It remains substantially under last November’s all-time high of 2466, which barely edged past its prior high of 2459 from November 2021.

Last week, the small cap index rose 2.4 percent to 2218. It has done well from April’s low of 1733, but the bullish momentum ran out of steam just south of 2300, well ahead of approaching its record high. On 23 July, it ticked 2283, and that was it. Last week’s rise was much weaker than the preceding week’s decline of 4.2 percent.

A rising trendline from April’s low has now been breached (Chart 2). Odds favor a breakout retest at 2100 happens soon.  On the 1^st (this month), the index did drop to 2143, but a genuine test of 2100 has yet to occur since June.
 

The ongoing dichotomy between large- and small-caps is also visible in how the June-quarter earnings season is shaping up.

With 79 percent having reported as of last Tuesday, S&P 500 companies brought home $64.57 in blended operating earnings in the last quarter. When the quarter began, the sell-side had penciled in $64.94. So, the delta between the two is not that high, with earnings only 0.6 percent lower than what was expected at the end of March. For mid- to small-caps, this is minus 3.9 percent and minus 10.5 percent – $47.39 versus $45.54 for the S&P 400 and $21.06 versus $18.86 for the S&P 600.

As a matter of fact, both the large- and mid-caps are faring much better than when the June quarter ended, as the consensus had dropped to $62.02 for the S&P 500 and $42.27 for the S&P 400; for the S&P 600, however, the sell-side was expecting $19.30 when the June quarter ended, still higher than the latest reported number (not shown in Chart 3).
 

The rather abysmal showing by the small-caps is also captured elsewhere.

Chart 4 plots the NFIB (National Federation of Independent Business) optimism index with the sub-index ‘actual earnings changes’. In June, the overall small-business sentiment slid two-tenths of a point month-over-month to 98.6, even as the ‘actual earnings changes’ sub-index dropped four points to minus 22. From the profit trend’s perspective, June’s drop is encouraging, but it is too soon to say if the trend will persist; small-cap investors, who have been burned many times before, did rally the Russell 2000 to 2283 last month but staying there proved difficult, as not all the small-business wheels are in sync.
 

In contrast, large-cap bulls have run away with the AI theme, not giving a hoot to other potential problems that could be lurking.

On 1 August, when July’s weaker-than-expected jobs report came out along with sharp downward revisions for May and June, the Nasdaq 100 gapped down to tag 22674 intraday; only in the prior session, it had reached a fresh intraday high of 23589. Unfortunately for the bears, the 3.9-percent intraday drop over two sessions was viewed as an opportunity by the bulls to go on the offensive.

Last week, the tech-heavy index jumped 3.7 percent to 23611, with a fresh intraday high of 23619 on Friday (Chart 5). Nearest support at 22900s, which was lost on 1 August, was recaptured as early as the week got underway on Monday, and by the end of the week, the preceding week’s bearish engulfing candle was neutered.

Since bottoming at 16542 on 7 April, the Nasdaq 100 has rallied nearly 43 percent – this in only four months! The index is way overbought, but the bears at the same time have failed to profitably grab opportunities that came their way. The bulls should be fine until they lose 22100s (Chart 5).
 

Amidst this, VIX has approached a crucial spot. Last week, the volatility index tumbled 5.23 points to 15.15, closing at the weekly low. Just underneath lies important horizontal support at 14.50s-14.70s, where VIX found itself in for several sessions in the first two months this year; this was again the case in the last six sessions of July. This is a must-hold for volatility bulls.

As VIX tumbled last week, it put tremendous pressure on the ratio of VIX to VXV, with the former measuring market’s expectation of 30-day volatility on the S&P 500 and the latter going out to three months.

Last week, the ratio finished at 0.81; in the prior two weeks, it read 0.96 and 0.815. So, over three weeks, VIX:VXV has done a round trip (Chart 6). Last week’s heavy risk-on environment in equities was helped by the unwinding of the elevated 0.96 reading; now, the unwinding could take place in the reverse manner.

During a risk-off investing environment, demand for VIX-derived securities tends to be higher than that for VXV. In this scenario, VIX should come under upward pressure.

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