This is why American small caps are likely to perform better in the coming weeks and months.
Value seekers are steadily increasing in demand for US small caps, using lower valuations compared to large caps – which show the largest difference in multiples in about 15 years.
Because smaller caps are more speculative, they are usually sold out first when worried about the economic recession. Recent advances in the suggestions suggest that these concerns will disappear – as the US and China are striving for a trade resolution and the Fed continues to move forward, along with its promise to continue supporting the economy.
To illustrate the market correlation between small caps and an impending recession, lower interest rates have consistently boosted small caps over the past 60 years. And during those periods, they won an average of 28% in the first year after the Fed started an interest rate cut cycle, almost double the 15% for large caps.
Perhaps that is why the Russell 2000 has outperformed all major US averages over the past three months, despite falling behind on a YTD basis.
The Russell has so far increased by 6.6% in November, followed by the increase of 4.3% and the increase of just under 4%. The index is only + 3.45% behind, almost half the Russell's profit.
However, when comparing YTD performance, the Russell 2000 still fails, with the smallest gain among the major US indices. It has increased by 20.45% and lags behind the 20.55% of the Dow, the S&P & 25.39% and the 30.33% of the technically demanding Nasdaq.
In other words, the Russell 2000 is still undervalued compared to larger caps. Technicals also suggest a further rise.
U.S. Pat. Smallcap Daily Chart
The small cap index offered an upward breakthrough for congestion with a downward bias since November 5. The range is a falling, bullish flag. The downward tilt is important. It suggests that investors who have transported the cargo have had the opportunity to unload. The congestion – a tight trade range, with only a slight tilt instead of a decline – shows that demand has absorbed supply.
This is significant. It means that there are new investors to take the weight.
The upward outbreak shows that all offerings have been absorbed and that bulls are willing to pay higher prices. Since the person who probably wanted to sell during this period, this market was expected to be on the side of the next stage. It is expected that it will repeat the previous sharp shot, 3.6%, from top to bottom, in the four days – October 31 to November 5 – before the market took a breather.
The signals, however, do not come from just a single technical phenomenon; there are other indications that provide confirmatory evidence.
The 50 DMA crossed over the 200 DMA, creating a so-called golden cross. It is a powerful one, given that both MA's are pointing up, and shows that the 50 won DMA with a rising 200 DMA. This makes much more sense than when it reaches a remaining 200 DMA.
The upward breakthrough also broke through a resistance since May 6. The meter has not been able to climb above the 1620 level since it collapsed from its record highs in August 2018, creating an upward trend since the bottom of December. It is the only major US benchmark that has not broken any new record highs since. If investors continue to prefer small caps, this can quickly reach new highs.
Trade Strategies
Conservative traders may prefer to wait for that new record to synchronize the uptrend in the short term with the long term.
Moderate traders can be satisfied with a penetration of 2% above the May 3 high to rely on the outbreak.
Aggressive traders may want to wait for a pullback so that they are not whipped out of their position.
Trade sample:
Listing: 1600
Stop loss: 1590
Risk: 10 points
Target: 1630
Reward: 30 points
Risk: reward ratio: 1: 3
