Russell 2000 Update: Small Caps Better Right The Ship Soon

The Russell 2000 got obliterated last week, plunging 8 percent. Since the June 23 all-time high, the small caps index has cratered 19.3%.  It’s extremely oversold and has many investors wondering about the extreme weakness in small caps stocks.

Furthermore, the small caps index is at the same level that it traded at in the Fall of 2013. And the “2000” is rapidly closing in on a critical price area and the index remains a severe underperformer relative to other stock market indexes like the S&P 500 and the NASDAQ 100.

With this week’s decline, the Russell 2000 has eclipsed its intraday low from late September, and is very rapidly closing in on its October 2014 low of 1,040. The index is less than 6 points above its October 2014 intraday low of 1,040.47. A strong, sustained break below 1,040 would complete a very large, complex head-and-shoulders top that would measure all the way down to the 800 region.

That may not be today’s business, but for obvious reasons, the small caps better right the ship in the not too distant future.

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The Russell 2000 index is very oversold on a daily momentum basis and there is the potential for a bullish momentum divergence on the weekly chart so the next week or two should be very interesting.

Here are the daily and weekly charts for the Russell 2000.

russell 2000 small caps stock decline oversold chart january 11

russell 2000 index bullish divergence chart weekly january 11

The worry of the week is, of course, China with a little North Korea thrown in there. These China worries have been ongoing since the last meltdown in August and are certainly one of the main reasons (according to many) why the major indices have been limping along. However, there must be more to it than just China. I’m not here to speculate as to why the market does this or that, just tell you up or down and how big.

So if China is a major equity worry, then why is the index made up of small caps stocks (the Russell 2000) leading the stock market to the downside and underperforming the S&P 500 since June?

From my experience, small U.S. companies do not have near (if any) the exposure to the international markets. Furthermore, 60% of the “2000” is made up of financials, IT, and healthcare. While some small IT companies may do business overseas, I doubt small financial and healthcare companies do. Something is not right about this picture and suggests there is more to worry about than just China.

Thanks for reading.


Twitter:  @MarkArbeter

The author does not have a position in any mentioned securities at the time of publication.  Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.