For most of 2015 small cap stocks, as measured by the Russell 2000, set the pace outperforming the large cap dominated Russell 1000. Last week the tables turned quickly as the Russell 2000 dropped over 3% while the Russell 1000 was down only a little over 0.5%. This is the biggest weekly divergence between large cap and small cap stocks for 2015 and largest since mid-July of last year. In fact, going back to December 1992 there have only been 45 weeks (not including last week) where the Russell 1000 outperformed the Russell 2000 by 2.5% or more. This is a small number considering there are 1167 weekly observations going back to December 1992.
Rare market observations are the sort of thing that gets me digging into numbers and here’s what I found out (don’t get too excited). The week following Russell 1000 outperformance the Russell 1000 outperformed the Russell 2000 again 23 times or 51.11% of weeks which means 48.89% of the time large caps underperformed large cap stock the following week. Yes, that’s basically a coin flip. The results were pretty much the same for other time periods as well. Finally, there was very little in the way of more than a coin flip when looking at the respective individual index’s performance after a week of strong large cap outperformance.
The last block trade I saw from Friday was the one that I am not a big fan of. It is also a trade can’t help but keep an eye on. I’ve written about far out of the money RUT call spreads and put spreads over the past few weeks and now it appears someone is taking things a step further. Near the close on Friday there was a seller of 5,000 RUT May 15th 970 Puts for 0.10. Those of you who were around the OEX in 1987 probably gasped a little as the crash of 1987 wiped out numerous far out of the money short put positions. The payout diagram below shows how this trade will fair at various prices when May 15th RUT options settle on the open that day.
You can’t tell, but there is 0.10 of distance between the breakeven level on the diagram above and the payoff anywhere above 970. The break-even level for this put sale is 969.90 which is down a tad over 21% and there are only nine trading days remaining until May 15th expiration. A lot has to go wrong for this trade to turn out as a disaster but the risk is substantial if this is one of those times.