If a broad market rally happens, it is the small-cap segment that will also witness a sharp price rise. While the large-cap indices like S&P 500 and Dow have recovered from their May-June lows, the uptick in the small-cap barometer of the US stock market – Russell 2000 – is also visible. S&P 500 and Dow 30 have moved up by 9% and 8% respectively over the last 3 months, the Russell 2000 index has gained almost 12% in the same duration.
The sharp reversal also caught many investors and traders by surprise. Whether the momentum will continue or there will be a pullback remains to be seen. The corporate earnings, inflation, recession, Fed rate hike remains the factors to watch out for unless there is a Black Swan event to upset the investor’s applecart.
Russell 2000 index is currently at 1957 levels and if one goes by a recent note by Paul Franke, ex- Editor and Publisher of the Maverick Investor newsletter, the index is at a crucial level. “My research of past instances says the primary and widely followed, smaller capitalization Russell 2000 index has reached a do or die moment. Either price is able to break through the upper resistance of the moving averages, similar to the 2020 rebound after COVID-19 panic selling ended. Or, we could reverse sharply lower, like the 2008-09 Great Recession period, with a banking/financial crisis and complete real estate bust,” says Franke.
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Investors need to be cautious at these levels and avoid taking fresh trades unless buying signals emerge.
Anton Kolhanov, a trader and an analyst expects the uptrend to continue, while the market is trading above support level 1920, which will be followed by reaching resistance level 2100. Kolhanov expects a downtrend will start as soon, as the market drops below support level 1920, which will be followed by moving down to support level 1715.
Russell 2000 is the index to go for when you wish to invest in lesser-known small-cap stocks. The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.
Russell 2000 is a part of the Russell US Indexes and primarily represents the small-cap stocks listed in the US stock market. Russell 1000 Index represents large cap stocks and together with Russell 2000, it forms the Russell 3000 Index. The Russell 2000 Index is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index.
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As of July 31, 2022, the top ten companies in the Russell 2000 were Biohaven Pharmaceutical, Shockwave Medical, Chart Industries, Rbc Bearings, Halozyme Therapeutics, Matador Res, Murphy Usa, Southstate Corp, Saia, Texas Roadhouse.
The volatility in small-cap stocks could be higher than in large-cap stocks and hence the risk-reward ratio should be considered before investing in them. Small-cap stocks are riskier than large-caps as they are in the growth stage and generally under-researched. Only once they grow in size, they are recognized by the market and enjoy better valuations. But some of these stocks are on a fast-growth trajectory and hence a careful selection of stocks is imminent. The small-cap segment is a good investment opportunity for long-term investors who have considered both the returns and the risks. Before you decide to invest in small-cap stocks, remember that they should not form the core of your portfolio.
Read More: Russell 2000 at a crucial level after small-cap stocks zoomed from June lows