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Russell 2000 Forecast: Small Cap Stocks Test Critical Support

Russell 2000 Forecast: Small Cap Stocks Test Critical Support

2019-08-27 18:40:00
Peter Hanks, Analyst
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Russell 2000 Forecast:

  • The Russell 2000 broke beneath lows from August 15 as the yield curve inverted further and investors piled into the TLT ETF
  • To date, the RUT is just 8% higher, versus the 14.5% return for the S&P 500 in 2019 – despite trade war headwinds
  • Interested in equities? Check out the Weekly Fundamental Forecasts for the Dow Jones, Nasdaq 100, CAC 40 and DAX 30.

Russell 2000 Forecast: Small Cap Stocks Test Critical Support

The Russell 2000 probed key support on Tuesday as the small cap Index threatened to break down beneath recent lows on August 15. The RUT has struggled to keep pace with its larger S&P 500, Dow Jones and Nasdaq 100 counterparts in 2019 – despite trade war headwinds that some believed could see smaller domestic companies outperform. Evidently, the potential for Russell outperformance has not materialized and the ratio of the RUT to the S&P 500 has slipped to its lowest since the trade war began and is nearing levels not seen since 2009.

S&P 500 Price Chart: Daily Time Frame (2008 – 2019) (Chart 1)

S&P 500 and Russell 2000 price chart

S&P 500 overlaid with RUT/SPX ratio in green.

While multinational corporations that trade on the S&P 500 and Dow Jones undoubtedly have greater exposure to international uncertainty, it could be argued they are also better suited to withstand recessionary periods. While no company is immune, larger corporations often have stronger balance sheets and greater institutional backing. Thus, recent recessionary fears sparked by the inversion of the 3s10s and 2s10s yield curves have likely helped to put investors on edge regarding the outlook and valuation of the smaller Russell 2000 stocks.

Russell 2000 Forecast: Small Cap Stocks Test Critical Support

To that end, demand for US Treasuries shows no signs of slowing. Inflows into the TLT ETF spiked above $400 million on Friday as trade war headlines battered large and small cap stocks alike. Since then, however, the S&P 500 has been able to recover somewhat while the Russell 2000 looks to threaten critical support on Tuesday.

Russell 2000 Price Chart: 4 – Hour Time Frame (January - August) (Chart 2)

Russell 2000 stock price chart

Trading near the 1,460 mark, a failure to close above horizontal support dating back to November 2017 could open the door to further losses. Should a break occur, subsequent support may reside near the 1,443 and 1,435 levels – an area not seen since January. With small caps on the precipice of a technical breakdown, follow @PeterHanksFX on Twitter for updates and analysis.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more:Canadian Dollar Price Forecast: USD/CAD Strength May Fade

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