Continuing Relative Weakness of the Russell 2000

The 04/28/24 blog “Russell 2000 Relative Weakness to the S&P 500” illustrated the long- and short-term bearish divergence of the Russell 2000 (RUT) to the S&P 500 (SPX).   As of 05/10/24  RUT continues  to diverge from the SPX and could be a bear market omen.

The daily SPX and RUT chart courtesy of Trading View shows their relationship.

At the SPX 03/28/24 all-time high it had exceeded its previous all-time high  made in January 2022 by more than 9%.   On  03/28/24 RUT had only retraced about 60% of its November 2021 to October 2023 bear market.

The upside under performance of the RUT continues.  On 05/10/24 the SPX had retraced 92% of its March to April decline.  Correspondingly RUT has retraced only 74% of the decline. 

Even on an intraday basis the RUT is weaker than the SPX.  Note that on 05/10/24 RUT closed near the low of the trading session.   The SPX ended its session at mid – range.

The RUT is composed of small cap companies, the SPX is large cap companies.   The reason the RUT has weaker upside performance is because smaller companies are hurt more by rising interest rates.

The 30 – year U.S. Treasury yield (TYX) chart courtesy of BigCharts.com illustrates its recent action.

The simplest definition of a bull market is a series of higher highs and higher lows.  This is what’s been happening with TYX since its late 2023 bottom.  Corrections in bull markets usually don’t last very long and quickly become oversold.

Slow Stochastic is very effective in identifying correction termination points.  Note that in the prior two instances when Slow Stochastic reached 15%, TYX subsequently made a new  bull market high. The current TYX rally could not only exceed its late April peak but may also reach the high made in October 2023. 

For several months there has been speculation about the U.S. – FOMC cutting short-term interest rates.   The FOMC has no control over long- term interest rates, and those rates are rising.  If the trend continues it will probably have an adverse effect on small cap companies and ultimately large cap companies.