Russell 2000 Index Poised for Major Breakthrough After a Long Stagnation

The Russell 2000 Index, which serves as a key benchmark for small-cap stocks, is nearing a significant technical breakout that could lead to levels not witnessed since late November 2021.

Key Resistance Level Under Scrutiny

On Wednesday, the index is challenging a critical resistance area around the 2,300-point mark, a level last approached on July 31.

Small-Cap Stocks Lagging Behind

While the S&P 500, Dow Jones, and Nasdaq 100 have achieved new all-time highs in 2024, the Russell 2000, tracked by the iShares Russell 2000 ETF IWM, remains 6.7% below its recent peak.

Market watchers are eager to see if small-cap stocks can rally and align with the performance of their large-cap counterparts, supported by signs of strong economic growth and lower interest rates.

Market Sentiment Shifts for Small Caps

Adam Turnquist, chief technical strategist at LPL Financial, noted that small caps have been confined within a consolidation phase recently due to investor concerns regarding economic stability and monetary policy. “Small-cap stocks are often more affected by economic shifts and changes in interest rates than their larger counterparts,” he remarked.

Encouraging economic indicators have started to boost the outlook for small-cap stocks. The U.S. economy has displayed resilience, with the Atlanta Fed GDPNow model projecting a 3.2% GDP growth rate for the fourth quarter of 2024, an increase from 3% in the third quarter.

Furthermore, the employment sector has surpassed expectations, adding 254,000 jobs in September—the highest monthly job growth in six months—well above the 159,000 jobs created in August and far exceeding the predicted 140,000. Meanwhile, the unemployment rate has decreased to 4.1%, alongside rising wages.

Turnquist emphasized that improved growth projections, driven by favorable labor market conditions and clearer forecasts for Federal Reserve rate cuts, have helped the Russell 2000 rise from its previous lows within a rising price channel.

Bank Sector’s Positive Impact

The banking sector has played a significant role in supporting the recent upswing in small-cap stocks, thanks to strong earnings results from major financial institutions.

Big U.S. banks, such as JPMorgan Chase & Co. JPM, Goldman Sachs Group Inc. GS, Bank of America Corp. BAC, Citigroup Inc. C, Wells Fargo & Co. WFC, Bank of New York Mellon Corp. BK, and Charles Schwab Corp. SCHW, have all reported better-than-anticipated third-quarter earnings, which in turn has created investor confidence in the overall financial sector.

This positive trend among large banks has also influenced regional banks, which represent the largest segment of the Russell 2000.

The SPDR S&P Regional Banking ETF KRE has extended its winning streak to six consecutive days, fully recovering from the banking turmoil that started with the failures of Silicon Valley Bank and Signature Bank in March 2023.

Breaking Down Technical Indicators

“If it closes above 2,275, that would confirm a breakout from its current symmetrical triangle pattern, with the 2021 highs being the next obstacle to overcome. Moreover, momentum indicators have taken a bullish turn, supporting the case for a significant breakout,” Turnquist explained.

Nevertheless, despite recent progress, the Russell 2000 continues to lag relative to the S&P 500—monitored via the IWM/SPDR S&P 500 ETF SPY ratio—illustrating that small caps have yet to significantly outperform large-cap stocks.

This ratio remains under its declining 200-day moving average, indicating that small caps still have room to improve. “A closure above the July highs would signal a reversal of trends in favor of small caps,” Turnquist added.

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