Crash, Boom, Bang! The Russell 2000 Enters Correction Territory (Again)

Takeaway: We've been repeatedly warning about style factor risk to small cap stocks.

Crash, Boom, Bang! The Russell 2000 Enters Correction Territory (Again) - russell 2000

 

The Russell 2000 took another beating yesterday. It was the most recent fallout in an already tough year. The small-cap index is down 3% year-to-date but is in correction mode from its 2015 high.

 

The Russell’s poor performance in 2015 is worth probing because it's crash actually exemplifies much of what Hedgeye has warned subscribers about all year. In yesterday’s Chart of the Day, Hedgeye CEO Keith McCullough walked readers through the style factors that have worked so far in 2015.

  1. Good Balance Sheets: Low Debt = +3.6% YTD
  2. Quality: Low Beta and Low Short Interest +1.7% and +3.0% YTD, respectively
  3. Organic Sales Growth: Top 25% Sales Growers in the SP500 = +7.3% YTD

 

Crash, Boom, Bang! The Russell 2000 Enters Correction Territory (Again) - 12.07.15 EL chart

 

Style factors also explain why Russell 2000 stocks are crashing from their 2015 highs. Here’s McCullough’s analysis from a note sent to subscribers this morning:

 

“The Russell 2000 moved back into double-digit correction mode yesterday (-10.1% since July’s all-time #Bubble high) as small cap, leverage, and high beta continue to some of the worst Style Factors to be long during a #LateCycle slow-down that’s driven by #Deflation expectations.”

 

Crash, Boom, Bang! The Russell 2000 Enters Correction Territory (Again) - russell 2000 down

 

Watch out.