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Market Statistics

There Is No Correction In Low Volatility Large Caps

Despite increased selling pressures in the S&P 500, NASDAQ-100, and Russell 2000, low volatility large caps reached new highs this week.

The chart below depicts the S&P 500 total return index since 1972.

The index made new, all-time highs this week as it closed above its December 2021 highs. The table below makes a comparison with the three popular stock indexes.

Total Return Indexes Drawdown* Year-to-Date
S&P 500 Low Volatility 0% +1%
S&P 500 -6.1% -5.5%
NASDAQ-100 -13.3% -12%
Russell 2000 -17.9% -10.9%

* As of April 8, 2022. This is not maximum drawdown for the year, or historically. 

In the past, there has been divergences between the S&P 500 low volatility large caps and the S&P 500 large caps, but not always in predictable ways. For example, before the dot-com bear markets, low volatility made a top in June 1999 and about 10 months before the S&P 500 made its top. Low volatility had returned to new highs by September 2020, but the S&P 500 had entered a bear market. Then, low volatility continued to make new highs until March 2002, when it finally reversed. Maximum drawdown for S&P 500 was about 48% but for low volatility it was about 23%, both on a total return basis.

I think the explanation is simple: large funds will never go to a 0% allocation for stocks if a bear market develops, but instead reduce exposure and shift to lower risk stocks because the timing of the rebound is unknown.

In addition, these divergences offer present long/short opportunities, but also, in this case, timing is of the essence.

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Disclaimer:  No part of the analysis in this blog constitutes a trade recommendation. The past performance of any trading system or methodology is not necessarily indicative of future results. Read the full disclaimer here.