(Bloomberg) — The selloff in technology stocks and small-caps is a warning sign that months of calm in the equity market are coming to an end.
"You're getting investors who were once euphoric preparing for more volatility on the basis that the economy and market may not be as strong as they believed," Matt McCormick, who helps oversee $11 billion as a fund manager at Cincinnati-based Bahl & Gaynor Inc., said in a phone interview. "It's natural that people would want to be more cautious in an environment where there are more questions than answers."
The Chicago Board Options Exchange Volatility Index has jumped 16 percent in two days, the most since April, as the Nasdaq Composite Index and Russell 2000 Index fell at least 2 percent. While the Standard & Poor's 500 Index has still gone for 56 days without a 1 percent drop, the second-quarter earnings season may lead to bigger stock swings.
Speculation that U.S. stocks have risen too far, too fast fueled losses yesterday as Raymond James & Associates Inc. said equities are vulnerable to losses and Citigroup Inc.'s chief U.S. equity strategist cited concerns for a "severe" pullback. The S&P 500 ended last week at an all-time high and the Dow Jones Industrial Average topped 17,000 for the first time. Global Growth
International Monetary Fund Managing Director Christine Lagarde this week signaled a cut in the institution's global growth forecasts, saying investment is still weak and U.S. risks remain. In Europe, signs the economic recovery is losing momentum have sent stocks lower for the past three days. U.K. manufacturing unexpectedly slumped the most in 16 months in May and German exports contracted more than estimated.
More than 130 companies in the S&P 500 are scheduled to report quarterly results in the next two weeks, including Citigroup, JPMorgan Chase & Co., Goldman Sachs Group Inc. and Johnson & Johnson.
"With the big earnings season coming up, we expect a pickup in volatility," Peter Tuz, who helps manage more than $450 million as president of Chase Investment Counsel Corp. in Charlottesville, Virginia, said in a phone interview. The VIX "was extremely low for quite a while, but that's over," he said. Investors have seen diminished stock swings with the VIX reaching a more than seven-year low last week. The gauge, known as a "fear gauge" because it tracks the cost of S&P 500 options, is still down 13 percent for 2014. The S&P 500 climbed 0.1 percent to 1,965.65 at 10:13 a.m. in New York, while the VIX slipped 0.7 percent to 11.90.
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