A crucial group of stocks could be signaling trouble ahead

I'm watching the Russell 2000 closely, as it's begun diverging from the S&P 500 recently, and that could signal trouble ahead for the broader market.

The small-cap Russell 2000 typically moves in tandem with the S&P 500, and has begun underperforming. While the small caps have fallen nearly 1 percent over the course of the last month, the S&P has rallied 2 percent in the same time.

Looking back at the history of such a divergence, I think of the trend we saw in 2015, when the Russell 2000 topped out two months before the S&P 500 did the same. This began a 14 percent decline for the S&P.

This isn't a major problem just yet, so I'm not waving a red warning flag on this index. However, if its recent mild underperformance becomes more substantial, it will raise questions about the durability of the U.S. economy heading into next year. That, in turn, will raise concern for the rest of the market, too.

After all, the Russell 2000 index should be the main beneficiary of Trump's tax reform package if (and I repeat, if!) Congress can pass it somewhat intact.

That being said, passing it somewhat intact is going to be very difficult, so this index could and should be a good indicator for the tax package. Given that so many personal deductions are being done away with in this new package, as we learned on Thursday, it's going to be very tough to get it through the Senate.

Much of the reason behind this year's rally has been based upon "synchronized global growth," but the U.S. economy is still the most important economy in the world, and if we don't see an extensive tax package passed, the U.S. economy will have a tough time sustaining its recent strong growth. This is also something the flattening yield curve is already telling us.

Vote to see results
Total Votes:

Not a Scientific Survey. Results may not total 100% due to rounding.


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more