How the Russell 2000 brushed off events in China to set up a period of outperformance

The last day of the trading month is upon us, finishing off a busy week that included earnings from “Big Tech” stocks, important US economic updates, and a stomach-churning ~10% fall in Chinese stock indices.

Stocks (2)

A fall of this magnitude in Chinese stocks would have flowed through into other regional capital markets in days gone past. One of my best days of trading ever was pre the GFC while part of the proprietary trading team at Goldman’s in Sydney after a 10% fall in the Shanghai Composite.

At the time, I had a good-sized long position in 3yr SFE bond futures calls that were worth considerably more the next day, benefitting from a flight to safety as global equity markets crumbled due to contagion fears.

This time around, key US equity indices have remained undeterred by this week's events in China, trading at or near to record highs. A reflection of the modern-day realisation that China is still not integrated into global markets.

Notably, this week, the “small cap” Russell 2000 outperformed its bigger brothers, the S&P500 and the Nasdaq. The last time the Russell saw a period of significant outperformance was following Joe Bidens election victory and the arrival of vaccines in November 2020, through until March 2021.

However, since early March, the Russell 2000 has marked time, trading sideways in a range between 2350 and 2100. Potentially the recent bottoming in US yields, which supports small cap value stocks, along with stretched valuations in tech, is ushering in a new period of outperformance for small caps.

>From a technical perspective, charts don’t get much better than the Russell 2000 currently. It appears to have completed a correction from the March 2360 high at the recent 2107 low, just above the 200-day ma.

From here, a test of range highs at 2360 is expected, before a push to fresh all-time highs near 2600, which would then complete an Elliott Wave, five-wave advance from the pandemic low of 966.

How the Russell 2000 brushed off events in China to set up a period of outperformance

Source Tradingview. The figures stated areas of the 30th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

More from Equities

Disclaimer

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.