The Tape
The S&P 500 closed Monday at 7,541.40, down 0.5%, its third straight loss and its lowest close since July 31. Energy fell 3.9% and Information Technology 2.7%, while Consumer Discretionary gained 2.2% and Materials and Financials each gained 1.8%, a spread of more than six points between the best and worst sector in one session. Momentum lost 2.8% and High Beta 1.8%, according to S&P Dow Jones Indices’ daily dashboard. Eight of eleven sectors finished higher, roughly seven in ten index members rose, and the equal-weight version of the index gained about 0.8%. Crude fell 7.4%, its largest one-day drop since July, after Washington and Tehran both signaled openness to talks. The VIX closed at 21.15, up 8.9%, its first close above 20 since July 29.
The Tell
Energy and Technology have been this year’s two strongest momentum sectors, and for much of the year they’ve moved against each other. That’s what kept the index calm while large moves ran underneath it, because when one fell the other tended to rise and the index absorbed the difference. Monday they fell together. Oil dropped on a diplomatic headline and Energy, up 14% in October, went with it, while Technology fell for the second straight session. The offset that had been working inside the index stopped working for a day, and the option market repriced the same afternoon. A 0.5% decline doesn’t usually carry the VIX through 20. Monday did.
That’s the read on participation, and it wasn’t a selloff. Capital moved out of the two crowded leaders and into nearly everything else, which is why the Dow, the S&P MidCap 400 and the S&P SmallCap 600 all finished up on a day the headline index fell. The index declined because of what it’s weighted to, not because of what the broad market did.
The Read
What this means for how capital is positioned: anyone holding the cap-weighted S&P 500 has been holding Energy and Technology as its two largest active bets, with the diversification between them doing quiet work all year, and on Monday that offset went away for a session while implied volatility repriced to a level it hadn’t closed at since July. The index can’t do anything about that. Its weights are its weights until prices change them, so the holder of the index carries both bets at full size on the day they stop offsetting each other.
For capital positioned sector by sector, Monday is a different kind of day. A 3.9% decline in a sector that gained 14% the month before is what a predefined exit exists for. Either the exit triggered or it didn’t, and that decision was made before Monday, which is the point of making it in advance. The same holds for Technology, where the largest share of the market’s momentum capital still sits, and which has now led the index down in both of its last two losing sessions.
The VIX above 20 isn’t a forecast. It’s the market’s current price for the next 30 days of index movement, and it rose on a day when seven in ten stocks rose with it. That tells you where the risk is being priced. It isn’t in the breadth. It’s in the concentration, and in the fact that the two positions that carried the year just stopped covering for each other. The question Monday leaves is whether your capital’s two biggest bets are the same two the index is making, and whether anyone decided ahead of time what happens when they fall together.
Mike Shell is the founder and chief investment officer of Shell Capital Management, LLC, a registered investment adviser. He serves as portfolio manager of ASYMMETRY®Managed Portfolios, a separately managed account program with trade execution and custody provided by Goldman Sachs Custody Solutions.
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