Small Caps Continue To Lag: The RUT made its ATH August 2018. Is That Bad!?

The Russell 2000 has been lagging all other major US indices since, well, late-August 2018. It made its All-Time High (ATH) back then and that’s it. Meanwhile the S&P500, for example, is already at SPX3000… What gives?

The chart below highlights some of the key technical aspects for the Russell 2000 and how price is performing relative to those. It also shows the two main possible Elliott Wave counts for this index. Key level to break for the Bears is the late-June low for starters, followed by the late-May lows as that would invalidate a possible 1, 2, i, ii setup. The Bulls need to see price back above trend-line and horizontal resistance.

The RUT remains below resistance and in a downtrend until proven otherwise.

Many pundits tell us a lagging small caps market is nothing abnormal and may actually be good for the broader indices. It will simply and eventually lead again, and that’s when the real Bull will (hopefully?) kick in. Great, all nice and dandy. But, question remains: When will that be?!

Because as long as the small caps are lagging, it means the rally in the broader indices is mainly driven by large-cap, safer, stocks (health care, utilities, etc). Traders and investors are simple not flocking to riskier, more economically sensitive, smaller companies. This in turn means these same traders and investors don’t think the current economy is as robust and strong as it is portrait. After one of the longest economic expansions in history, that is likely not such a bad idea. All in all those are signs of a late-stage Bull, not that off a new Bull.

In the end, as long as a rally remains risk-off and as long as the small-caps are lagging it remains a concern. Simple as that. Oh, and don’t forget none of the F A A N G stocks (FB, AAPL, AMZN, NFLX and GOOGL) have made new ATHs in many months -some in almost a year- either. Hence, the lag in market participation is not necessarily only confined to small-caps, which adds a bit of insult to injury.

So, uncertainty remains the name of the game, as usual, and if that is something you find hard to trade against, then a proven price-based trend-following trading system is the way to go: On May 20th I launched my new trading systems for my followers on my private twitter trading feed and my short-term system is already up 8.5% in six easy trades while the S&P500 (per the SPY) added 5.2%. Check it out and give it a try I’d say.

Short-term trading performance since May 20, 2019

Arnout, Ph.D.


Founder and President Intelligent Investing, LLC 
Vice President NorthPost Partners, LP

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