STOCKS Lagging Russell 2000 pointing to a correction

Or will it catch up with the large-cap indices and hit record highs?

The major US stock indices attempted to push higher again at the start of today’s US session. Earlier in the day, index futures were noticeably lower along with European markets. The earlier losses followed price action from the day before, when the S&P 500 hit a new record high before quickly easing back as Donald Trump disappointed prior expectations by providing no fresh news regarding the US-China trade situation. The US President merely suggested that a phase one deal “could” happen soon and that China wanted it so badly. Sentiment was also hurt by falls in Asian markets due to ongoing anti-government protests in Hong Kong. But at the time of writing, the major US indices had regained their poise – all except the small-cap Russell 2000.

The fact that the small-cap Russell 2000 index has been unable to join the fun may be indicative of a market where a select few massive large-cap stocks such as Apple and Microsoft are propelling the likes of the S&P and Nasdaq disproportionally. There is the risk therefore that once these racy stocks stop rising, say, because of investor realisation that they may be massively overvalued or otherwise, then the whole market could correct itself. The risk of a correction is high in my view because of the lack of any fresh stimulus to support stock prices after a multi-week rally based on speculation over a trade deal that may or may not happen. Grated, central banks have stepped up bond purchases again in Europe and the US, driving investors into equities, but even this source of support has its limitations. A healthy correction may be welcomed by some stock market bulls also, as this will provide them opportunities to pick up their favourite stocks at discounted prices at some later point in time.  

But going back to the issue of Russell’s performance, it is worth remembering that this this small cap index is not only underperforming today, it has been lagging for a long time now. While the likes of the S&P 500 are at record highs, the Russell is yet to break its high from earlier in the year (1618.6), let alone the highs from the previous year (1745.5). At around 1600, it has hit a major resistance zone, where it had struggled in the past. Here, it has created a few bearish-looking candles on its daily chart (see the inset). But, it could still push higher, given that it hasn’t broken key supports such as 1575 or the most recent significant low at 1550.

So going forward, the bulls may wish to wait for the index to close above the key 1600 hurdle, before looking for long setups. Meanwhile, the bears may step in should the index break its bullish price structure by creating a lower low beneath 1550.

Source: Trading View and City Index.