The small-cap Russell 2000 index has remained unchanged since January 2021. However, it has underperformed the S&P 500 index since its peak in 2013, with a brief period of outperformance from October 2020 to March 2021.
Is it Time for Small-Cap Stocks to Shine?
While small-cap stocks may be on the verge of a significant advance that lasts more than a few months, it is not yet the time to heavily invest in this sector. Let’s examine the charts to get a better understanding.
Analyzing the Charts
On the weekly price chart of the Russell 2000 (shown above), we can observe three failed attempts to break through resistance and three failures to penetrate support. However, it is noteworthy that the rally following the October low was the fastest to reach the top of the trading range. If the index manages to hold at or above 1850 during pullbacks, it would be an encouraging sign.
Relative Strength vs. S&P 500
Although the Russell 2000’s price action appears stronger, its relative strength against the S&P 500 tells a different story. After being in a bear market for ten years, the relative strength declined and broke below its 2020 low before reaching final trendline support. However, with positive momentum divergence, there is a possibility that relative strength may rally by 10% compared to the S&P 500, albeit within the context of a long-term downtrend.
The Warning Signs
It’s important to note that breadth, which measures market participation, is significantly weaker than the price action. While the Russell 2000 surpassed its January 2023 high, the advance/decline line remains far below its respective January high by nearly 10,000 issues.
Potential Upside and Risks
If the Russell 2000 manages to close above 2060, it could generate upside projections to 2300. This would be a clear signal to consider buying either the index or the iShares Russell 2000 exchange-traded fund. However, it is crucial to be cautious, as the weak breadth indicates a high-risk trade.
