Russell 2000 (IWM, quote) Continues to Sag.  Owning volatility and outright short exposure to this small cap index makes sense. We continue to like the beta match between the Russell and Emerging Market equities.    

Image courtesy thetaxhaven: http://www.flickr.com/photos/83532250@N06/There is often a higher correlation between Emerging Market equities (EEM, quote) and small cap stocks due to (lower) liquidity matches and the less established nature of the underlying companies' balance sheets or business models.                                             

The IWM ETF tracks the Russell 2000.  The IWM has been seeing volatility creep higher in the last three weeks after the spike in early February with global markets.  Today the IWM tested through the 200 day moving average and bounced into the close. 

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Overall the breakdown in small cap stocks is a function of much higher multiples.  We find a divergence of the SPX (SPY, quote) and the Russell 2000 across the index at a time when investors are rotating from growth into value. 

Russell 2000 has a 60x multiple compared to the S&P 500.  The breakdown in small caps has the index trading back to October 2013 levels and -7.5% from the highs while the SPX meanwhile is only -1% from its peak.  The divergence of the indices started in late January.

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