In the early 1960’s the late great market analyst Richard Russell wrote about a phenomenon that occurs near the end of stock bull markets. The phenomenon is an upward surge of small cap stocks. As a stock bull market develops many stocks are in extended rallies, making it difficult to find new stocks to buy. The natural inclination is to purchase stocks that have not yet participated in the rally. Many times, these lagging stocks are of smaller companies, which are more vulnerable to economic difficulties.
The recent upward surge of the small cap – Russell 2000 (RUT) could be an example of late stock bull market – bargain hunting.
The daily RUT chart courtesy of Trading View illustrates its action since its 2021 top.
RUT has moved marginally above the Fibonacci .618 retracement of its November 2021 to October 2023 bear market.
The upper Stochastic line has reached the overbought zone, and the RSI is in the overbought zone. The current manic surge could terminate in a few trading days.
In the big picture, on 07/12/24 the S&P 500, and the Dow Jones Industrial Average made new all-time highs. RUT is still far below its all-time high made in November 2021. The RUT and the main U.S. stock indices should be making new all-time highs together. It’s been over two and a half years that’s’ happened!
The disconnect between small and large cap U.S. stocks could be heralding a deep and sustained bear market.
On 07/12/24 RUT moved above 2,140.00 which was the stop loss level for half of a short position on Rusell 2000 funds. The position was initiated at the RUT open on 05/23/24. The loss of half of the position was 1.25%.
Recommended reading: “Dow Theory Today” {1961} – Richard Russell.
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