Traders worry big divergence in stock market is warning – CNBC.com

Traders worry big divergence in stock market is warning – CNBC.com

The small cap Russell 2000 was slightly higher, after finishing down 2 points at 1,105 Wednesday, below its 200-day moving average for a second day. Whether the Russell 2000 is a red flag for the broader market or not, it could continue to feel the heat as investors trim positions in momentum and small cap names.

Stocks that had disappointing earnings news, such as FireEye were crushed, but others got smacked purely for their high valuations. Zulily plunged 30 percent Wednesday after reporting a disappointing loss. Facebook, which trades at 72 times earnings, fell nearly 2 percent. Priceline.com which has a trailing P/E of 31, was down more than 3 percent. Tesla lost nearly 3 percent during the day and fell another 8 percent in after-hours trading after it reported earnings and disappointing outlook.

Zulily was the only one of those names that moved higher Thursday.

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“I knew it would dislocate from the market and it wouldn’t drag the market with it,” said Steve Massocca, portfolio manager of the Wedbush Hedged Dividend Fund. “These ridiculous stocks are getting clobbered, but it’s not having an impact on anything else. As it plays out, it will no longer have an impact on the market. There’s nothing wrong with the businesses. The problem is the valuations are gi-normoulsy off base…We’re only beginning the process in these particular stocks.”

But the divergence between the Dow and the Russell and Nasdaq was unusual in Wednesday’s trading, and some technicians warn it might be a good time to play it cautiously.

“You have the Dow and the S&P within a percent of their all-time highs. You’ve got social, internet, biotechs and small caps struggling to hold their 200 days. That’s a big disconnect. That’s got traders on edge,” said Scott Redler of T3Live.com. ” You also have the bond market strong and rates bouncing along the bottom, which doesn’t support a strong economic view.”

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Traders worry big divergence in stock market is warning – CNBC.com

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