Russell 2000 – Teetering on the Edge?

Click to enhance / enlarge
Click to enhance / enlarge

 

Above are two charts of the Russell 2000 (IWM). The first shows the IWM breaching its 200-day moving average last week, although the bottom of the chart shows the oversold nature of the Russell 2000 today.

The 2nd chart takes a longer look at the Russell 2000 (weekly chart).

In terms of YTD returns, 2017 has been all about Technology, and large-cap, as the updated spreadsheet shows.

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Note how 2017 has turned out to be the exact opposite of 2016 (4th data column) and 2015 was the exact opposite of 2016 and more like 2017.

We’ve had a few years where growth dominated value like 2015 and 2017 and then the opposite happened.

This is known as “style-box” or some might call it “factor” investing, and It is being incorporated more-and-more into client accounts to capture reversion-to-the-mean return. Of course, the downside of this style is a period like we saw from 1995 to 2000 where one sector and one style (i.e. large-cap growth) dominated for such an extended period.

Will the Russell 2000 fold here ? I recently was fortunate enough to get invited to a Strategas Partners presentation here in Chicago where Jason Trennert and a number of his partners talked about the state of the US capital markets. An interesting fact was thrown out from the panel – from Jason, Chris Verrone, Rissmuller, et al.: approximately 1/3rd of the Russell 2000 components are now unprofitable ? The percentage could be higher, but I also could have heard wrong too.

Conclusion: my own experience is that “style-box” trends tend to last for calendar year’s, so the plan today is to stay overweight Tech, but with an eye to add the “value” ETF’s as year-end draws closer. This could change – a lot depends on tax reform and what Congress and the President do in terms of the fiscal agenda, which should benefit large-cap and growth versus small-cap, particularly with a cash repatriation bill.

Personally I’d love to see small-cap’s and the Russell 2000 take a beating in the next few months and then rotate into the asset class.

Thanks for reading.

 

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