Q1 2019 - Russell 2000 Outlook

Russell 2000 [$RUT] Weekly Chart – 14-Period RSI

Strong Rebound in Relative Strength Index: Above 40 Level in January, Signaling Reversal of Q4 Mayhem

While prices attempt to reverse four months of loses that preceded Christmas 2018, Relative Strength Index readings have been less than encouraging in the Russell 2000. Struggling to hold the 50 level, RSI in small caps now materially lags its large cap counter-part as the S&P 500 RSI approaches 60. Falling resistance from 2018 record high levels remains in place after prices failed to rally past 1,600 in March. The 1,740 closing high is a full 12% higher than the current price level as of this writing, whereas the S&P 500 sits only 2.2% off the record close at this time. Demonstrating a clear loss of leadership as a sector over the past six months, peaking in August ahead of the broader market in late September into October, small caps stocks may no longer be useful as an intermarket indicator. This type of sector rotation is not uncommon, and in fact may be telling.

Russell 2000 [$RUT] Weekly Chart – 50 Week Moving Average

Moving Average Line Meets Falling Resistance to Form March Pivot High, Just Below 1,600 Level

Russell 2000 [$RUT] Daily Chart – Candles

Resistance at 1,600 Level Remains in Place from Pullbacks Against Q4 Downtrend

From the standpoint of Behavioral Finance, in the late stages of a Bull Market investors tend to hold on to their best quality stocks, the ones they consider “Blue Chips” while they sell their riskier issues. In this case, the risk being sold represents smaller companies with high earnings multiples, many of whom do not pay dividends. The chart below illustrates a clear series of lower highs and lower lows since the ‘Gravestone Doji-esque’ February pivot high. While this index fights an intermediate downtrend, the broader market opened a gap up today to start the quarter, reaching its highest point of 2019 and now in position to return to record levels in a single session. The Russell 2000 is simply no longer the place to go for Beta in the current market environment, if you insist on going out past the S&P 500 on the Risk Spectrum, consider the Nasdaq Composite.

Russell 2000 [$RUT] Daily Chart – Candles

CBOE Russell 2000 Volatility [$RVX] Daily Chart w/ 20-Day MA

Small Cap Stock Volatility Returns to Average Historical Range in 2019, Following Spike to 36

The chart below clearly shows horizontal resistance at the 1,570 level, rejecting mid-March rally attempts and ultimately pushing prices to lower lows. This is a stark contrast from the S&P 500 Hourly Chart ( Menotomy Q1 2019 - S&P 500 Outlook) where a similar line can be drawn at 2,780, although the price action resides above it. In addition to the outlook for better performance moving forward, a portfolio indexed to the S&P 500 [SPY] in favor of one indexed to the Russell 2000 [IWM] will pay an additional 65 basis points in annual dividends (According to data from iShares & State Street Global Advisors). Important, as re-invested dividends have the same type of earning power as compound interest. Investors should consider these factors to achieve long term success as vigilantly as traders watch the tape every single day. Bottom Line, I’ll be trading the S&P for now.

Russell 2000 [$RUT] Hourly Chart – OHLC

Resistance Firmly in Place at 1,570 Closing Level: Pushing Price Action to Lower Low, Test of 1,500