Who's In Charge?

It's not large cap growth

US equities finished another week in directionless fashion. Here’s an update of the daily SPY chart that we’ve been watching. Note that day-to-day volatility as measured by Average True Range % continues to rise, suggesting that investors are struggling to agree on what the right price should be.

Looking at our recap, you can see that only two of eleven global equity indices were green for the week.

You can also see that all primary measures of volatility were higher and that chopped 25 points off of the VIX Mix. Friday saw a small uptick to get the gauge back into Neutral. But none of the component indicators are bullish while nine are bearish.

The recent action has dragged down the 10-day moving average (purple line) of the Mix consistent with the softness in the equity indices. Note that SPX and the Mix have been more or less in sync since equities got shaky at the beginning of June. No divergence that might suggest a change in direction.

At the same time, the VIX futures term structure continues to behave reasonably well in the face of equities exhibiting increased volatility. Week to week, the July contract rose a bit, but nothing like the two-point move higher for spot VIX.

One of the reasons that the major indices have been misbehaving is that the small number of really big stocks that drive index performance have been taking it on the chin. This next chart has a lot of information, so let’s break it down.

• The top pane is the relative performance of the Mag 7 relative to all the large cap stocks that are not Mag 7. Most recently, it rolled over in the middle of May. Not good for the indices.

• The bottom pane shows the performance of MAGS, XMAG, IWM (Russell 2000 small caps) and EEM (Emerging Market Equities) going back to the start of 2025. You can see where MAGS (red line) recently lost the script relative to IWM and XMAG. But the real surprise for most people is that emerging markets have clearly outperformed over this period. We don’t hear too many people talking about the usefulness of having international equities in portfolios.

So the headline US equity indices are captive to the performance of maybe a dozen really big companies that are all in the tech space (even though not all are components of the XLK ETF). SPY and QQQ are not currently “the place to be.” Small cap stocks and international equities have taken charge, at least for the moment. If we are to believe the relatively stable shape of the VIX futures term structure, then we are seeing a market in rotation rather than a market that is broadly fragile. Given that our focus is the volatility in US equity markets, we will be watching the behavior of indices like XMAG and IWM for signs of weakness along with the VIX and VIX futures term structure. Even though the short vol trade (e.g. long SVIX) gave back some ground last week, the alarm bells aren’t sounding. But we also don’t have the all clear for risk-on positioning. Sometimes you need to be patient.

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