1/ Relative to S&P 500 Index
2/ Flat 200-day Moving Average
3/ Short-term Moving Average Breadth
4/ Daily Price Momentum Oscillator
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1/ Relative to S&P 500 Index
Small-caps relative to large-caps are trading at decade lows. The below chart takes the Russell 2000 and divides it by the S&P 500 Index. The result is a price ratio chart. When the blue line is trending lower small-caps are underperforming.
Many investors have commented on the attractive relative valuation of small-caps. This is certainly true – however valuations can get worse. Price charts can help us determine when the asset class is trending, providing a more favorable entry point for long-term investors.
2/ Flat 200-day Moving Average
The most watched small-cap stock index is the Russell 2000 Index. It’s the only major US index that is trading below its August 2022 highs and below the 200-day moving average. The slope of the 200-day moving average is flat, as this index is struggling to establish trend.
3/ Short-term Moving Average Breadth
One positive development for small-caps is the index is holding a crucial support zone around 1,700. This zone was tested 3 times over the past year.
Additionally, short-term moving average breadth appears to be bottoming. When evaluating the percentage of Russell 2000 stocks trading above their 50-day average, we’re near 20%. A level that historically marked a near-term bottom in the index.
4/ Daily Price Momentum Oscillator
Short-term momentum indicators are also optimistic. The below chart highlights the daily price momentum oscillator (PMO). This indicator is very similar to the popular MACD indicator. We’re yet to witness a bullish cross (highlighted by green circles) but the PMO line is turning up in anticipation of a cross. This points to bullish short-term momentum in the index.
Yes, the Russell 2000 Index is trendless. But so long as the 1,700 level holds, I’d expect the bulls to outnumber the bears.
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Originally posted 11th October 2023
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