Russell 2000 Index: A Glimpse at a Potential Breakout

The small-cap stocks tracked by the Russell 2000 Index are on the brink of a notable technical breakthrough that could propel them to levels unseen since late November 2021.

The Challenge of the Resistance Zone

As the index tests a critical resistance area near the 2,300-points mark – a ceiling not breached since July 31 – investors are closely monitoring whether small-cap securities can stage a rally to narrow the gap with their large-cap counterparts.

Despite the S&P 500, Dow Jones, and Nasdaq 100 reaching new all-time highs in 2024, the Russell 2000, represented by the iShares Russell 2000 ETF (IWM), still lags behind by 6.7%.

The Economic Landscape

Adam Turnquist, LPL Financial’s chief technical strategist, highlighted that small-cap stocks have been in a consolidation phase as investors pondered the prospects of a soft-landing scenario and the trajectory of monetary policy.

However, an upturn in the economic data and positive Federal Reserve sentiments have brightened the outlook for small caps.

The Banking Sector Catalyst

The recent rally in small-cap stocks has been propelled by the robust performance of major U.S. banks, including JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon Corp., and Charles Schwab Corp. All these financial giants exceeded third-quarter earnings expectations, fostering optimism in the broader financial domain.

The strength in large banks has led to a cascading effect on regional banks, a significant component of the Russell 2000. The SPDR S&P Regional Banking ETF (KRE) saw a six-day rally, fully recovering from the banking turmoil triggered in March 2023 by Silicon Valley Bank and Signature Bank’s collapse.

The Path Forward

Turnquist pointed out that a breakthrough above 2,275 would confirm a breakout from the current symmetrical triangle pattern, with the 2021 highs standing as the next resistance barrier. Additionally, momentum indicators have recently turned bullish, further supporting the case for an upward breakout.

However, it’s vital to acknowledge that despite recent progress, the Russell 2000’s relative performance against the S&P 500, measured by the IWM/SPDR S&P 500 ETF (SPY) ratio, continues to trend downwards. The ratio remains below its declining 200-day moving average, implying that small-cap stocks have not yet outperformed their large-cap counterparts.

Turnquist emphasized that a close above the July highs would signify a potential trend reversal favoring small-cap stocks outperforming large caps.