Despite North Korean geopolitical risk flaring up this afternoon, there are market participants pointing to some additional reasons for today’s pressure. Aside from the fact that equity markets are hitting these recent highs on low volume (which is typically a market correction warning), investors are paying close attention to the Russell 2000, which has been a good leading indicator of market direction for the last several months.
This week alone, the Russell 2K is off -4% versus a -1% pullback on the S&P 500, and we’re also seeing the small-cap market index fall below its 50 day-moving average (green line) for the first time since November. If the trend continues, we could see further downside risk in the S&P 500.
Additionally, if the last few years are any example, we could see a pullback of roughly -7% over April/May in the S&P 500. Two out of the last three years were seasonably weak during April/May, falling -7% in 2010 and 2012, respectively. In 2011, the weakness came a month later, where the markets fell -17% from May to September.