Can Russell Defend Its 13% Gain Above Yearly Low?

Small-cap stocks have enjoyed their time in the sun since the yearly low of 1690 as investors dialled back recession concerns. Will that change after the last FOMC?

The Anti-Recession Play

Small-cap stocks staged a breakout earlier in June, finally bringing the Russell 2000 off of break-even for the year and outside its 1690-1810 range. The move was a welcome relief for some analysts worried about the market's lack of breath, as gains had been driven almost entirely by a handful of big-tech stocks. It got to the point that Apple's valuation even surpassed the entire Russell 2000. Last Wednesday, the latest move from the Fed provided mixed signals for the market, with the dot plot matrix seen as hawkish while the post-rate decision presser left a more dovish tone. So Russell put a 3-month high in at 1910 and took a breather.

The index concentrates on most of the listed US regional banks, so the gains off this year's low came to a sudden halt in the middle of March. While other indices have staged subsequent recoveries, the premier small-cap index has remained under pressure, as the regional banks are still trading down around 40% this year, dragging on the index. But small-caps, generally, have been performing better since the release of May NFP data, suggesting that the US economy is doing better than initially feared.

So, No Recession?

This month's rally in smaller companies has been led primarily by value stocks, which might have more to do with traders looking for a broader range of defensive plays than expecting a full-on recession to be avoided. Analysts suggest that small caps will eventually "catch up" with the big names, and traders expecting the big tech rally to have run its course are looking for options.

But others argue that the rally coincides with an improved economic outlook, with more hope of a soft landing as inflation comes down as the Fed skipped (or paused, since Fed Chair Powell insists it wasn't a skip) rate hikes in a potential sign that the top is very near, and the latest industrial data provides mixed signals instead of outright negative ones like in the past. What could resolve the situation is whether the Fed will go through two more hikes. The next meeting might offer a definitive answer on whether it was a skip or a pause - or even the peak.

Outside Range and Impulsive

The impulsiveness of the Russell 2000's price action implies the index is on a path to further recovery, with the range top (not bottom) at 1810 as crucial support. If the support holds firm in a correction under the regional low of 1855, the entire pattern off 1700 could end up being a broadening wedge with a throw-over of its peak. This would expose 2k, while interim peaks at 1935 and 1965 might form resistance. On the flip side, losing 1810 might open the door to fresh yearly lows, contingent on the weakness of 1750 and 1700.

Key Takeaways

The Russell 2000 index has gained around 13% since its yearly low in March, but there are concerns about whether this trend will continue following the latest FOMC meeting. Value stocks have led the rally in small-caps, and there is speculation that traders are looking for defensive plays. Some analysts believe that small caps will eventually catch up with big tech names, while others argue that the rally signals an improved economic outlook.