Dire Market Warnings

In my last article, we took a deep dive into the S&P 500 index to evaluate the signs and likelihood of a bear market. Today, we will examine the other equity market indexes to see if they are also indicating a bear market correction. There are four major stock market indexes in the United States, the S&P 500, the Nasdaq, the Russell 2000 and the Dow Jones Industrial Average. While they are all made up of stocks, each has their own individual characteristics due to the stocks that make them up.

The Nasdaq 100 index is an index that is comprised of the top 100 stocks listed on the Nasdaq exchange. As you can see below, the index is weighted heavily in the technology industry. The Dow Jones Industrial Average (the Dow), is one of the most popular indexes and most quoted in the world. It is interesting because it is made up of only 30 stocks. While many quote the Dow as a proxy for the American Economy, it is in fact a poor representation of it and is unevenly weighted.

Sector allocation lists for the Nasdaq, Dow and Russell 2000 Indexes.

 

The Russell 2000 index is made up of smaller companies that have most of their business dealings within the US. The weighting of the index is also more aligned with the economy of the US. The largest sector portion of the index, financials, is also the largest employer. This makes the Russell 2000 index a better barometer for measuring the health of the stock markets and the economy. 

During the 2007 market crash, the Russell 2000 index peaked well before the other indexes. This relatively unfollowed index showed traders who were paying attention that the markets were worsening and that the new highs in October 2008 were not going to last.

Stock chart showing the July 2007 peak in the Russell 2000 index

 

The same picture is happening today. The Russell 2000 index peaked in August 2018, before the peak of the other indexes in September. Since then, there was a drop in the index of over 27% from those highs. At the time of this writing, the Russell index is still down over 17% from the highs.

Stock chart showing negative divergence in the Russell 2000 index.

 

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