Thursday Playbook: What to watch after yesterday's small cap bloodbath

Jeff Macke

High flying momentum names had a rough Wednesday but the broader market shrugged it off. Will the weakness seep into other sectors? Maybe says Yahoo Finance senior columnist Mike Santoli:

We’ve seen these divergences building in the market where you have the bigger stable old economy and even old tech stocks holding up really well, the absolute indexes not far from their all-time highs and under the surface you have lots of stocks getting smacked, lots of stocks down 20%, the small cap index breaking it’s 200-day moving average.

As Aaron Task, Yahoo Finance Editor-in-Chief, notes:

A lot of the technicians are looking at that and saying ‘wow that’s a sign of weakness in the average stock while the blue chips are still holding up fairly well thanks to a couple names holding up the averages,' but typically these things don’t end well for the averages.

Santoli reminds us of the momentum sell-off in February and March. While the broader marked didn’t fall off a cliff those momentum names did send it toward official pullback territory. So how will you know if it’s all happening again?

“One thing i’d be looking for is if this rally in the bond eases off a little bit,” Santoli says. “In other words if the ten year yield starts to lift a little bit...then let’s see what happens to the overall market.”

Regardless, he says, there’s evidence that even if the market is in for some rough waters it’s not time to hide you money under the mattress.

“The stuff that really is economically sensitive, it’s been OK,” Santoli notes. “So that’s why I’m not as worried that this is all of a sudden the market saying that we’re on recession watch or something scary like that.”

As for those former high fliers like Twitter or Whole Foods that just got shellacked yesterday? “Some people would say looking at the volume of the sell-off that maybe that’s the end of the sell-off,” says Task.

“You had a crisis of faith in these hyper growth names and it does seem like you’re getting to that point of people are just tossed them out,” adds Santoli. “They’re no longer interested in riding this out, the just want to get rid of them.”

More from Breakout:
Small caps slammed! Tension builds on Wall Street
For Whole Foods, this is how the 'growth' story ends
Burned by crashing tech names? Here’s one sector to protect you


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