Let’s take a closer look at the Russell 2000 to identify technical levels that will help signal an improving technical backdrop for small-cap stocks and risk assets in general. The chart below is weekly data for the Russell 2000 with three technical indicators, numbered on the chart that  we are monitoring.

What Would Signify A Small-Cap Recovery?

1) Momentum – The top panel illustrates a weekly momentum indicator, which I’ve used for decades to help track 1-2 quarter shifts. That data was overbought and peaking in late Q1, and one of technical reasons we cautioned Q2 was likely to be more volatile. That indicator and is still negative but I’m expecting it to bottom and turn up by early to mid Q3. At this point the Russell will need to rally just over 4% to turn that momentum indicator positive and thereby signal a new upside move underway.

2) Price – The current price pullback continues to look very similar to what developed in Q2/Q3 2016 shortly after the cycle low in Q1 2016. The Russell 2000’s price today is pulling back after a strong Q1 rebound from what I believe was another cycle low in December 2018. Given an uptrend is defined by higher highs and higher lows, a move back above the Q2 highs at 1618, just over 5%, is needed to confirm the index has resumed it’s uptrend.

3) Relative performance versus the S&P 500 – This relationship is where our bullish view is clearly less convincing given the relative performance trend has been down since the middle of 2018 AND is challenging levels last seen near the 2016 lows. Interestingly, the relative performance downtrend looks very similar to what I see for many Banks, which is not surprising given the small-cap index is heavily weighted in Financials and other cyclicals. However, it’s important to note that it would not take much of a rally for the small-cap index to reverse that relative downtrend. What could cause the upside reversal? I expect an oversold rebound in bond yields will likely be the catalyst in Q3.

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