Despite increased selling pressures in the S&P 500, NASDAQ-100, and Russell 2000, low volatility large caps reached new highs this week.
The chart below depicts the S&P 500 total return index since 1972.
The index made new, all-time highs this week as it closed above its December 2021 highs. The table below makes a comparison with the three popular stock indexes.
| Total Return Indexes | Drawdown* | Year-to-Date |
| S&P 500 Low Volatility | 0% | +1% |
| S&P 500 | -6.1% | -5.5% |
| NASDAQ-100 | -13.3% | -12% |
| Russell 2000 | -17.9% | -10.9% |
* As of April 8, 2022. This is not maximum drawdown for the year, or historically.
In the past, there has been divergences between the S&P 500 low volatility large caps and the S&P 500 large caps, but not always in predictable ways. For example, before the dot-com bear markets, low volatility made a top in June 1999 and about 10 months before the S&P 500 made its top. Low volatility had returned to new highs by September 2020, but the S&P 500 had entered a bear market. Then, low volatility continued to make new highs until March 2002, when it finally reversed. Maximum drawdown for S&P 500 was about 48% but for low volatility it was about 23%, both on a total return basis.
I think the explanation is simple: large funds will never go to a 0% allocation for stocks if a bear market develops, but instead reduce exposure and shift to lower risk stocks because the timing of the rebound is unknown.
In addition, these divergences offer present long/short opportunities, but also, in this case, timing is of the essence.
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