VIX Acts Like It Wants To Rally

Small-caps and tech continue to diverge. Post-vaccine news, longs are gravitating toward the former and leaving the latter. Amidst this, signs of fatigue are also showing up on the S&P 500, while VIX acts like it wants to rally (VIX).

The Russell 2000 (IWM) is up 16.1 percent the last three weeks. Nine weeks ago, small-cap bulls defended horizontal support at 1450s. The rally that followed stopped just north of 1600, This level has proven to be important for both bulls and bears going back to January 2018.

Three weeks ago, during the election week, bulls cleared that roadblock. This was then followed by positive vaccine news from Pfizer (PFE), which raised investor optimism that the US economy would begin to get back to normal next year. Small-caps inherently have larger domestic exposure than their larger-cap cousins, which are also internationally exposed.

The Pfizer news lit a fire under small-caps. In the week of the 9th, the Russell 2000 finally eclipsed its old high from August 2018, but barely. Last week, in response to Moderna’s (MRNA) similarly positive vaccine news, the small cap index broke free, tagging an all-time high of 1805.20 on Wednesday but ending the week at 1785.34, leaving behind a little bit of an upper shadow, but nothing serious (Chart 1).

In the futures market, non-commercials are now sitting on most net longs in Russell 2000 mini-index futures since the last week of February this year (more on this here). Small-caps have suddenly become the go-to sector. This trade will end at some point as it becomes too lop-sided, but as things stand, there are not much distribution signs.

Tech, in contrast, is sending different vibes.

Leading up to the vaccine developments from Pfizer and Moderna, tech massively led. For the year, the Nasdaq 100 (NDX) is up 36.3 percent, compared to 10.1 percent for the S&P 500 and 7.5 percent for the Russell 2000.

At the same time, the Nasdaq 100 has essentially gone sideways for three months now (Chart 2). Post-vaccine news from Pfizer two weeks ago, it has massively underperformed small-caps in particular, with the index down 1.5 percent, while the Russell 2000 rallied 8.3 percent.

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