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The small-cap
Russell 2000 index
is exactly unchanged from where it was in January 2021. On a relative basis, the index has underperformed the
S&P 500 index
since peaking in 2013. (The Russell 2000 did outperform for a brief six-month period from October 2020 to March 2021.)
So is now the time for small-cap stocks to shine? My work suggests that while they are getting closer to beginning an advance that will last for more than a few months, it isn’t yet time to issue an all-clear signal to overweight the sector. Let’s look at the charts.
The weekly price chart above shows the Russell 2000’s three failures to hurdle resistance and three failures to pierce support. What is encouraging is that the rally off the October low was the quickest to reach the top of the trading range. Holding at or above 1850 on pullbacks would be very encouraging.
The Russell 2000’s relative strength versus the S&P 500, above, is much weaker than its price action. Having been in a 10-year bear market, relative strength declined to final trendline support after breaking below its 2020 low. With momentum diverging positively, relative strength may rally 10% versus the S&P 500 (within the context of a long-term downtrend).
But be warned: Breadth is much weaker than the price action. Unlike the Russell 2000, which exceeded its January 2023 high, the advance/decline line remains far below its respective January high by almost 10,000 issues.
If the Russell 2000 closes above 2060, then my work would generate upside projections to 2300. That would be a signal to buy the index and/or the
iShares Russell 2000
exchange-traded fund. But if breadth doesn’t improve meaningfully, then this would be a high-risk trade.
Andrew Addison is the author of The Institutional View, a research service that focuses on technical analysis.
Write to [email protected]
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