Momentum stocks, small caps under fire

The Russell 2000 and the Nasdaq Composite are in the most significant pullbacks since January's emerging-market dive.

By InvestorPlace Mar 28, 2014 5:31PM

Traders work the floor of the New York Stock Exchange on the evening of January 23, 2014
File Name: John Moore/Getty ImagesBy Anthony Mirhaydari

While the large-cap averages continue to slide sideways, this week saw a significant weakening of big tech momentum favorites and small-cap stocks.

In fact, the smooth-as-silk uptrends in the Nasdaq Composite ($COMPX) and the Russell 2000 ($TOMX) since late 2012 are now at risk as both indices are perched on critical technical support.

Hit by recent selloffs in heavyweights like Twitter (TWTR) and Amazon (AMZN), as well as biotech stocks, these indices have scythed beneath their 50-day moving averages in the most significant pullbacks since the January dive on emerging-market fears.

That's worrisome since the Russell 2000 and Nasdaq are better, broader representations of the health of the overall stock market than what's happening in the Dow Jones Industrial Average ($INDU).

Both the Nasdaq and the Russell 2000 have largely stayed above their 20-week moving averages over this time. Excursions below have been short-lived buying opportunities, such as the dips seen in January, last June and last April. Such persistence actually exceeds what was seen during the dot-com bubble of the late 1990s (not in the magnitude of the rise but in its unbroken nature).

But now, both averages are perched right on this level as they roll out of the most overbought technical conditions -- as highlighted by the relative strength indicator shown in the chart above -- since 2011.

To be sure, these professionals are vulnerable to a breakdown here, which means the selling could get intense. Jason Goepfert of SentimenTrader notes that active investment managers, based on survey data, have continued to maintain extreme long exposure to stocks.

The most recent results from the National Association of Active Investment Managers show that "the average exposure, the spread between most bullish and most bearish managers and confidence amongst all managers is at extremes seen only two other times in the eight-year history of the survey. These were early January 2007 and early January 2014."

Both times were followed by difficult periods in the market.

There is plenty of other evidence of excessive exuberance. Money-losing IPOs are being rushed to market. The bond market is awash in covenant-lite or "cov-lite" loans that trade bond holder rights for the promise of higher yields. And any slowdown in the economic data -- whether it's home sales here at home, manufacturing activity in China, or retail spending in Japan -- is dismissed as nonthreatening since it only increases the odds of fresh stimulus measures from policymakers.

Goepfert also highlights what he's dubbed the "Smart Money Index" -- which subtracts the performance of large stocks during the first half-hour of trading and adds the last hour. The justification is that retail investors are more active in the morning, while the professionals are active near the closing bell.

As you can imagine, the index has been moving lower quite violently over the last two weeks.

In fact, since at least 1998, a two-week decline of this magnitude has never been recorded. The only time that nears what we're seeing now was in late 2007/early 2008 as the last bull market was in its death throes.

I'm not saying that a repeat is a 100 percent sure thing. And neither is Goepfert. Yet, after considering all the evidence, the situation is certainly scary.

For the more aggressive traders out there, the breakdown in big tech stocks is creating put option opportunities in names like Google (GOOG) and Facebook (FB).

The FB April $65 puts that I recommended to clients last Friday are up more than 200 percent in just a week -- demonstrating just how violent some of the selloffs have become.

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Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters, as well as Mirhaydari Capital Management, a registered investment advisory firm. As of this writing, he had recommended puts against GOOG, FB and AMZN to his clients.

Mar 29, 2014 12:06AM
Can't wait for the narcissism bubble to explode!
Mar 29, 2014 12:11PM

Didn't realize this was an Anthony Article...

Yup we really aren't making too much headway this Quarter....Or made..

Randall or Randy may just have got it right for once...?

Mar 29, 2014 7:53AM
A) We're going to see artificial bolstering of Twitter until it becomes clear to the world that it's service is the key communication portal for psychopathic terrorists, especially those doing the job blockade and market steerage. The best part-- those using it can't stop using it so when one goes down they all do. 
B) No "virtual" is a heavyweight, Anthony. They cannot sustain and as fiat money printing dies, they do too. No ability to sustain without artificial support.
C) You don't name any stocks with the ability to create and maintain economy. Wiping out financial tyranny and restoring free enterprise creates opportunity. If it's tangible not virtual, it leads to jobs and prosperity. 
D) Read your history again. we have wars on new fronts, total global economic failure and owe so much that the next 10 generations won't retire it. The "change" we can all believe in- comes by way of closing the banks, ending the Federal Reserve and getting RID of Wall Street. Unless you have a viable skill set and can market it with tangible results, you aren't looking too good.

Be a plumber, because being a financier as the world retaliates for pure greed doesn't get any dumber. 

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