Breadth Expands, Metals Reset, Fear Still Mispriced

1) SMALL – The small-cap stocks with the "good" fundamentals are finally starting to participate.  Until recently, leadership in small caps was coming almost entirely from indexes that didn't care whether companies made money or not.  That created a noticeable gap.  Small-cap indexes with no earnings requirements were moving higher, while the indexes that require companies to be profitable lagged behind.  That difference matters.  According to Standard & Poor's, the S&P 600 uses an earnings screen.  Companies must have a track record of positive earnings before they can be included in the index.  And now, that group is starting to catch up.  Earnings don't matter in the Russell 2000, and that index has been in the lead.  One of the biggest differences between the two indexes is biotechnology exposure.  The S&P 600 has far less of it, while the Russell 2000 has much more.  Both indexes are loaded with financials, plenty of technology, and a healthy dose of industrials.  But the S&P 600 also carries significantly more consumer discretionary exposure, paired with much less biotech.  What’s this saying?  Participation is broadening, not contracting.  Healthy.

2) METALS – Copper is down 3.14% this AM, and narratives are floating that “growth is over.”  You know, Dr. Copper is one of the better growth signals.  But this pullback is likely just a buying opportunity in copper.  Given the growth in data center build-outs, some of which will need more than 1 million pounds (thanks, Dale S.) of the stuff!  Copper is not dead.  Additionally, platinum, palladium, silver, and gold are all correcting some here.  Silver is very volatile right now, with the low end of its TRADE range at $77.51, currently trading at $88.72.  No, I don’t think the silver trade is over, but some digestion here would not be surprising.  After all, silver is up 39.21% in just the last month. 

3) VIX – It may surprise some, but the VIX is not a valuation hedge.  It’s not a timing tool.  It’s a shock hedge and gives you an indication of what kind of protection is being bought inside the market.  There’s really only one situation where it makes sense to hedge by buying VIX: a macro event or a structural breakdown.  Examples where buying VIX works would be Mar 2020 (COVID): overnight uncertainty, forced deleveraging, volatility exploded.  2008: systemic risk, broken plumbing, survival fear.  Sudden bank failures, war escalations, or unexpected policy shocks.  These are moments of dislocation - when the market doesn’t know how to price risk.  Clearly, none of these exist right now, so the market is able to price risk reasonably well.  Is the Iran situation one where VIX might be a good hedge?  Sure.  Many believe that there is a non-zero probability that the U.S. attacks over the long weekend.  But, that probability is relatively small…around 20%.  Regardless of geopolitical issues (which are ALWAYS with us), what continues to stick out is a 107% implied volatility PREMIUM in the SPY (S&P 500 proxy), down from 121% yesterday but still very elevated.  That remains a very well-hedged market which tends to be good for markets.  Bond volatility continues to decelerate as well with the MOVE Index now down to 56.14.  By comparison, it was over 134 during the MAR – APR 2025 correction.  Calm bond markets are good for all markets.