Index in Focus: Russell 2000 making a strong move of its own!
Joe Perry August 26, 2021 3:44 AM
The Russell 2000 has a 5.5% gain over the last 4 days
While the S&P 500 and the NASDAQ 100 have been making all-time highs, the small cap Russell 2000 has been underperforming and is nearly 5% below its all-time highs. This is even after posting a 5.5% gain over the last 4 days. Why is RUT underperforming its stock index peers? Smaller companies are more sensitive to higher interest rates and higher inflation. With the expectation of tapering to begin “sooner than later”, companies in large cap indices are better positioned to produce strong earnings even though inflation is rising.
The NASDAQ 100/Russell 2000 shows the ratio of the 2 assets. If the line is moving higher, then the NASDAQ 100 is performing better. If the ratio is decreasing, then the Russell 2000 is performing better. Below we can see that from early September 2020 until mid-March the ratio was moving lower, as investors were concerned that the economy would reopen and the “stay at home” NASDAQ 100 stocks would underperform the mom and pop Russell 2000 “go out” stocks, particularly in hospitality and leisure. In mid-March, when Fed Chairman Powell said that “substantial further progress” would be needed before the Fed would begin tapering, investors got nervous as inflation and inflation expectation were on the rise (not believing Powell, who said inflation will be “transitory”). Therefore, the NASDAQ 100 began to outperform the Russell 2000.
Source: Tradingview, Stone X
Since the reversal in March, the ratio has been forming an ascending wedge. Last week, the ratio moved above the 61.8% Fibonacci retracement from the September 2nd highs to the March 12th lows at 6.94. Horizontal resistance sits just above at 7.08. However, since then the ratio has turned lower and it is threatening to take out the bottom trendline of the ascending wedge, near 6.08. If the ratio moves below the trendline, it has room to move to the downside. First support is at 6.64, with room to move to 6.33.
The Russell 2000 was moving higher from late October 2020 until March. However, as the NASDAQ 100/Russell 2000 ratio began moving higher, the Russell 2000 was only moving sideways. The Russell 2000 broke below its upward trend and has been trading between 2085.12 and 2360.17 ever since! Last week, the small cap index traded below the 200 Day Moving Average at 2085.12 and failed, resulting it the previously mentioned 5.5% gain over the last 4 days However, near-term resistance is just above at 2256.44. If price breaks above there, it can move to test its own all-time highs at 2360.16. Support is below at the 200 Day Moving Average, then the lows from August 19th at 2122.24. Below there, price can fall to the bottom of the range near 2085.12.
Source: Tradingview, Stone X
The Russell 2000 has had strong gains over the last 4 days. This may very well be positioning ahead of Fed Chairman Powell’s speech on Friday at the Jackson Hole Symposium. With the NASDAQ 100/ Russell 2000 turning lower and threatening to break below the ascending wedge, the index may be at the start of a new trend!
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.