Canary in the market coalmine

  • Small caps have recently exhibited renewed relative strength
  • Small caps often lead market higher during bull periods, lower during bear phases
  • Russell 2000 has moved mostly sideways since March

As a trader, it helps to have good peripheral vision.

With all the hubbub surrounding the record highs in the S&P 500 (SPX) and Nasdaq 100 (NDX), no one seems to be noticing the Russell 2000 (RUT). But the small-cap index has done something noteworthy the past couple of days—something that, if it continues, could be a potential “micro signal” for the broader market.

The RUT’s seemingly modest accomplishment consisted of being the strongest major US stock index the past couple of days, which has put it in position to challenge the ascendant NDX for this week’s first-place ribbon.

That could be good news for bulls because, as longtime traders know, the RUT often leads the market to the upside during its most energetic rallies, just as it often leads the market lower during downtrends. Take a look at the following chart comparing the year-to-date performance of the RUT, SPX, and NDX:

Russell 2000 (RUT), S&P 500 (SPX), Nasdaq 100 (NDX), 12/31/18 – 4/24/19. RUT leads early

Source: Power E*TRADE

The NDX may be ahead of the pack now, but when the market burst out of the gate at the beginning of the year and began erasing last fall’s correction, it was the RUT (white line) that led the charge. (If you’re interested in the opposite phenomenon, check out a chart of the three indexes from September-December of last year.)

It’s not an isolated example. The rally that began after the US market made roughly two-year lows in February 2016 shows the same thing—Russell 2000 relative strength:

Russell 2000 (RUT), S&P 500 (SPX), Nasdaq 100 (NDX), 2/11/16–6/17/16. Small caps inaugurate the uptrend

Source: Power E*TRADE

But since hitting its YTD high a little above 1,600 in late February, the RUT has mostly moved sideways, dropping below 1,500 in March before rallying back toward the upper end of this trading range (chart below). In other words, for the past few weeks the RUT has been neither fish nor fowl: It’s not in a downtrend, but its uptrend is arguably on hold until it can break out above the top of the range—and, the bulls hope, keep going.

Russell 2000 (RUT), 12/12/16–4/24/19. Russell 2000 (RUT) price chart. Watch the range.

Source: Power E*TRADE

One possibly encouraging sign in that vein: The RUT has formed a higher swing low (i.e., above the March low at the bottom of the range). Since uptrends, at their most basic, consist of a series of higher highs and higher lows, an upside breakout of the range and the establishment of another higher low (above the April swing low) could be the first sign the RUT may want to challenge its own record highs.

The opposite scenario could also tip the market’s hand: If the RUT instead broke the bottom of the range and failed to rebound quickly, some traders may take it as a sign of weakening bullish momentum for the broad market.

The Russell doesn’t have to lead for an overall uptrend to be in effect, but history suggests an uptrending RUT can provide tailwinds for the rest of the market.

Keep an eye on that weather vane.

Market Mover Update: Is there something about the letter “W”? WIX (WIX) rallied to its second-straight record high yesterday, Waste Management (WM) made it four in a row (see “Trading market shocks: Waste not, want not”), and Aqua America (WTR) hit its highest levels since January 2018 (see “After the flood, traders go with the flow”).

And although both indexes appear to be in need of a breather yesterday, the Nasdaq 100 (NDX) edged out its third-straight all-time intraday high, while the S&P (SPX) topped Tuesday’s record by a hair.

Today’s numbers (all times ET): Durable Goods Orders (8:30 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Amazon (AMZN), AbbVie (ABBV), Altria (MO), American Airlines (AAL), Baxter (BAX), Bristol-Myers (BMY), D.R. Horton (DHI), Dunkin (DNKN), Raytheon (RTN), Rockwell Automation (ROK), Southwest Air (LUV), Waste Management (WM), (BIDU), Ford Motor (F), GrubHub (GRUB), Intel (INTC), iQIYI (IQ), Juniper Networks (JNPR), Mattel (MAT), Starbucks (SBUX).


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