A quick glance at the markets suggests an uneventful day, but investors lugging around shares of smaller capitalization, “non-defensive” stocks know just how deceiving that appearance is. The story today is the unrelenting pounding being endured by stocks like Whole Foods Market (WFM) and the divergence between the S&P 500 (^GSPC) and the Russell 2000 (represented by the IWM ETF).
As I discuss with Yahoo Finance Editor-in-Chief Aaron Task and Mike Santoli in the attached video, any company exhibiting vulnerability is getting crushed. Whole Foods is down 20% off a lousy quarter. Business was unquestionably bad but under normal circumstances that was a 10% or maybe 15% miss. For investors to be throwing away Whole Foods down 20% there has to be panic building. That’s the first sign of a more dramatic sell-off.
For companies that that really have issues there are no signs of a bottom being made. Twitter (TWTR), AOL (AOL), GroupOn (GRPN), Zullily (ZU), FireEye (FEYE) are all down more than 20% in the last two days. That’s a crash.
Related: “Trending Tickers: Sell-off edition”
Santoli says Google (GOOG) is the canary. Shares are off more than 13% from the highs as investors try to decide whether it’s a blue chip or high flying trash to be sold.
Dangerous trends to watch
Right now investors are trying to run from perceived “risk” stocks in favor of defense. History suggests the selling won’t end until there’s a capitulatory flush out of equities as a whole and we’re not there yet. The Russell is down almost 5% for the year while the S&P 500 clings to a 1% gain. That spread needs to close. History suggests the S&P will give way to the downside before the Russell can put in lows.
The other chart to watch is the Nasdaq. A so-called “Head and Shoulders” chart is being formed. To keep it simple just put it in the back of your head that if the Nasdaq closes under 4,000 chartists will be looking for a whoosh to somewhere near 3,600.
Tension is ratcheting up on Wall Street. If you’re a long-term forever true believer in stocks there’s no reason to fret but your resolve could be tested.
Be careful out there.