Why The Russell Is Getting Whacked

Poor economic data out of Germany and Japan continues to weigh on the DAX and Nikkei which are down -17% and -13% respectively from their recent highs. You can add the Russell 2000, here at home, to the list of market dogs. “The Russell looks like hell,” Hedgeye CEO Keith McCullough said on The Macro Show earlier this morning.

Why The Russell Is Getting Whacked - Small cap canaries 09.23.2014

For the record, the small-cap index is down over -10% from its recent high hit earlier this summer. As McCullough notes, “The drawdown from the all-time high is currently two times the drawdown in the S&P.”

Why The Russell Is Getting Whacked - russell 2000

Why?

According to McCullough, the hedge fund community continues to use S&P futures as their short-selling mechanism, not the Russell, which does not have that same amount of short interest. So small-caps tend to fall much faster.

In addition, the Russell is anchored to a slowdown in U.S. growth to a greater degree than the S&P 500. In other words, it’s a pure play on flagging U.S. growth expectations (which happens to be our house view).

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Our take: With the continual implosion of U.S. economic data – from PPI to Retail Sales – setting up an increasingly nasty-looking Holiday season, shorting domestic growth should continue to work out. 

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