Monday was no ordinary session. It hosted a breakout nine months in the making and could lead to a powerful awakening in small caps. For the lion’s share of 2021, small caps (as reflected by the Russell 2000 – RUT or IWM) have underperformed their larger-cap brethren. While the S&P 500 and Nasdaq continued to notch new highs throughout the summer, the Russell slumbered.
The months of sideways brought silver linings to the little guys. For starters, it allowed overbought pressures to ease. Lest you’ve forgotten, RUT scored one of its largest runs in history after last November’s Covid-19 vaccine news. The ascent pushed prices to the moon, making them need a period of digestion.
A second perk to the pause was it allowed earnings to play catch-up. Recall that when price outpaces earnings, valuations rise. If prices then pause while earnings climb, valuations fall. In sum, these nine months of consolidation have helped the RUT create a more sustainable bull market. In conclusion, we are faced with a classic example of the following phrase: “The longer the base, the higher in space.” Of course, there aren’t any guarantees, but if this breakout sticks, we could see a fantastic run into year-end to make up for the months of waiting.
Chart of the Day: Sir Russell Awakens
Monday’s high volume super surge in the Russell 2000 Index ETF is the most compelling breakout attempt we’ve seen all year long. Are small caps finally ready to roar?
Video of the day: What is market cap
Market capitalization is the total dollar market value of a company’s outstanding shares. Commonly referred to as market cap, it is calculated by multiplying a company’s current market price by the total number of shares outstanding. Investors use this figure to determine a company’s size, as opposed to other metrics using sales or total asset figures.
Today’s line up
Tales of a Technician: The Big Breakout in Small Caps
Some trading sessions are normal. They lie in the meat of a distribution curve, hugging the mean. Monday was not one of those days. Rather, it was an outlier and a positive one at that. While the S&P 500 and Nasdaq slept the day away, Sir Russell, the mighty steward of some two-thousand small caps across the land, awoke.
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