VTWO - Tech Stocks Soar In March Small Caps Suffer VTWO Holding Support

2023-03-31 17:19:23 ET

Summary

• March was one of the most bifurcated months we’ve seen in the last few years with the mega caps leading while small regional banks endured losses.
• Treasury volatility remains historically high, making the rate outlook uncertain as the Fed mulls a pause.
• I outline key price levels to watch on the VTWO Russell 2000 ETF as we head into Q2.

Is March the new October to you? It feels that way to me. Consider the many market bottoms or just broad volatility events that have occurred around the notorious “ides of March” timeframe. 2023 joins 2020, 2009, and 2002, among others, as featuring upticks in vol and downward price action followed by a swift rebound.

This year’s version featured a mini-banking crisis. (At least that’s how the bulls hope to describe it when looking back many months from now.) The SVB fallout, Signature Bank’s failure, and international fright with UBS’s forced takeover of Credit Suisse all stoked 2008-like fears. Alas, equities both at home and abroad rebounded during the final stretch of the month, and many indices posted robust gains.

In all, the S&P 500 Trust ETF ( SPY ) rose 3.7%, led by the tech sector. The Nasdaq 100 ETF ( QQQ ) rallied nearly 10%, while the regional bank-exposed Russell 2000 suffered a material 5% decline. Overseas, Euro Area equities quietly performed well, up 5%, – earlier this week, I wrote about how the EURO STOXX 50 ETF ( FEZ ) jumped to a fresh 52-week high. The global ex-US market registered a sporty total return of 3%. All the while, bond prices surged during the early and middle part of the month amid a flight to safety – the iShares Aggregate Bond Market ETF ( AGG ) rose 2.6%, including dividends.

Tech Shines in March, Small Caps Suffer

The sector view tells the story, too. With steeply falling interest rates, long-duration equities outperformed while economically-sensitive niches suffered negative alpha. Interestingly, even later in March when interest rates inched back higher as crisis fears abated, the tech trade kept working.

It goes to show that light investor positioning heading into 2023 was a long-lived tailwind for names like Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG) (GOOGL), Meta Platforms (META), Tesla (TSLA), and Nvidia (NVDA). That handful of glamour equities dipped to 20% of the S&P 500 market cap at the turn of the year low but has since recovered to 25%, according to BofA Global Research.

FANG+ Comes Roaring Back

While the FANG+ names rise back to life, commodities have come under pressure. In March, the broad commodity index tracking ETF ( DBC ) was slightly lower despite gold surging 8%. Gold miners, often a levered play on moves in the shiny metal, jumped 18%. The U.S. Dollar ETF ( UUP ) dipped 2%, which is usually a boon to commodities, but that was not enough to lift the United States Oil Fund ( USO ) to finish green.

Gold Miners Strike Gold As The Dollar Ebbs

On the economic front, the jobs market continues to hum along. February’s NFP report surprised to the upside with a 311,000 net employment gain, stoking fears of more Fed rate hikes. It was the 10th-straight headline payrolls beat (chart below). Then came the CPI report mid-month, which assuaged fears of a pickup in inflation that were brewing in February. If those data points seem like a distant memory, you’re not alone. The banking crisis peaked about the time when the CPI report hit the tape on March 14. As it stands, the peak Federal Funds Rate is now seen near 4.95% in July, but high interest rate volatility makes the bond market outlook highly uncertain.

0 Consecutive Monthly Job Beats, Next Report Due Out On Good Friday

US CPI: 8 Straight Monthly Declines

Treasury Rate Volatility Spikes To Near ‘08 Highs In March ‘23

Fed Funds Rate Seen Peaking Under 5% in July

Let’s home in on the laggard of the global stock market in March to see if there are any clues on a comeback. The Vanguard Russell 2000 ETF ( VTWO ) is a low-cost way to access the popular small-cap segment of the total domestic stock market. What has made the smalls so risky lately is that it has a high allocation to Financials at more than 16%, illustrated in the chart below from Vanguard . Also, what worked in March, the Tech-Media-Telecom (TMT) trade, is just a fraction of VTWO’s positioning compared to the SPX. The upside here is that if the banking niche does not see more major shoes dropping, and the Treasury yield curve steepens amid easing Fed policy , that would benefit regional banks , and the small caps.

VTWO: Heavy In Financials, Light In Technology

As it stands, small caps trade a low 11.9 forward operating price-to-earnings ratio and 2.0 times book. While paying a small 1.2% yield, small caps are generally risk-on play on where the broad economic growth expectations go.

Seasonally, data from Equity Clock show that small caps tend to notch a nadir in late March before rallying through mid-late July, but there can still be some volatility through mid-May over the past 12 years.

Small Cap To Stage a Q2 Rally?

The Technical Take

The Russell 2000 ETF continues to trade in a range between $65 and the low $80s. Notice in the chart below that this roughly 20% zone is going on a year old. That comes after another range, which marked a top in the fund, was in place for much of 2021. So, even if we climb above $82, the $85 to $95 range will be tough to get through as it is an area of major supply – those who bought there will look to sell to get back to even. In general, with a low valuation, I continue to like small caps, and owning VTWO here with a stop under $64 is a decent risk/reward setup.

VTWO: Mired In A Trading Range

The Bottom Line

Equities rallied in face of a lot of bad macro news in March, but risky small caps underperformed sharply. Looking ahead, bullish seasonal trends often ensue, but all eyes will continue to be on the banks, inflation, and the Fed.

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