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Chart of the Day / Small Cap Russell 2000 Failing at Triple Top

Small Cap Russell 2000 Failing at Triple Top

May 15, 2018

The Russell 2000 is hitting record highs, as small-caps continue to rally.

In fact, it’s now up 5.1% for the year, as compared to the 2.5% returns on the S&P 500, and the scant 1% move on the Dow Jones Industrials.

“When the economy is stronger than normal, small caps do better,” said Ryan Detrick, senior market strategist for LPL Financial, as quoted by Reuters. “With a good economy like we’ve seen happening this year, we fully expect this to keep playing out in the second half of the year.”

Of course, an expanding U.S. economy and corporate tax cuts have played a part, too.  In the past, small caps were forced to pay higher tax rates than their bigger rivals, which means that in many cases, they had more to gain from the tax cut plans.

Plus, the domestic focus of smaller companies makes them a bit less vulnerable to overseas issues, such as trade wars between the U.S. and China, too. Also weighing on bigger stocks is the strength of the U.S. dollar, which recently hit four-month highs.

In fact, since the dollar’s 2018 low in 2018, small cap stocks have outperformed large cap stocks across every sector, notes CNBC.

According to Market Watch:

“Small-cap stocks tend to be more U.S.-focused in terms of their geographic footprint and where they derive their revenue. As such, they are seen as insulated from all manner of international headwinds, including trade policy and other geopolitical tensions. Furthermore, they are not suffering from recent strength in the dollar, which typically emerges as a headwind for large-cap companies by eroding their overseas profits.”

However, the run may be nearing an end, as the Russell 2000 challenges triple top resistance.  Should the index begin to fail at the current level, we could see the index dip to at least 1,550 from 1,600.

It’s a wait and see at this point, but my money is on downside, near-term.

One way to consider trading a potential downfall is by buying to open the iShares Russell 2000 ETF July 20, 2018 158 put at market prices.