Small Caps Indicate Market Weakness

Chart of the Russell 2000 (RUT) - Small Caps Indicate Market Weakness
Chart of the Russell 2000 (RUT) – Small Caps Indicate Market Weakness – Source: and TradingView

All of the major U.S. benchmark indexes fell on Tuesday. Trade war worries – this time between the U.S. and the European Union – and pre-earnings-season jitters weighed heavily on markets. On a percentage basis, the small-cap Russell 2000 index (RUT) fared significantly worse on Tuesday than the large-cap Dow Jones Industrial Average, S&P 500, and Nasdaq Composite.

Is the Small-Cap Index a Leading Indicator?

Even more worrying, though, the past several weeks have seen small caps underperform large caps on a technical basis. This is especially concerning because the Russell 2000 is considered by many to be a leading indicator of the broader market.

Whenever markets rise or fall substantially, chances are good that the small-cap index initially led the way. We saw this clearly late last year when the Russell 2000 first began its steep declines back in early September, while the Dow, S&P 500, and Nasdaq waited a full month after that before plunging.

Russell 2000 Showing Technical Weakness

More recently, technical signals have emerged suggesting that the market’s bullish trend so far this year may not be as strong as previously thought. For one, all three of the large-cap U.S. indexes have made ‘golden crosses’ (bullish technical pattern where the 50-day moving average crosses above the 200-day moving average). But the Russell 2000 has yet to form one.

Secondly, the Dow, S&P 500, and Nasdaq have all hit new year-to-date highs in early April. The Russell 2000, in contrast, failed to break its February high.

Finally, the small-cap index is now slightly below its 200-day moving average. But all three large-cap indexes are still far above their own respective 200-day moving averages.

What Could This Mean for the Markets?

Does this relative weakness in the small caps mean that large-cap stocks are in for a fall?

Not necessarily. But there is a likelihood that the Russell 2000 is giving us a bearish warning about overall market structure that should probably not be ignored.

IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors. 

Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.

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