Small caps hit new high, look set to break out and drive broader market gains

Published Tue, Nov 2 20214:17 PM EDT

Patti Domm @in/patti-domm-9224884/@pattidomm

Small caps are a step closer to the breakout that many strategists have been waiting for, and that could signal more broader market gains. The Russel 2000 index closed at an all-time high of 2,361.86 on Tuesday, surpassing the March high that has acted as a ceiling on the small-cap benchmark all year. It's now up nearly 20% for the year, still trailing the 23% gain in the S & P 500. "I think we're setting up nicely for the breakout," said Ari Wald, technical strategist at Oppenheimer. "The breakout of small caps here represents the fire power for equities broadly. A bet on small caps is a bet on all. If we do see this breakout, we are likely to see large caps, Nasdaq participation in this move." Katie Stockton, founder of Fairlead Strategies, said she is waiting to see if the breakout is confirmed by two Friday closes above the 2,360 March close, now a resistance level. "All three major indices, the S & P 500, Dow and Nasdaq, have already confirmed breakouts to new highs," she said. "What it would also indicate is breadth continues to expand. Breadth is market participation." Stockton said it could have a positive impact on relative strength. "It creates a relative catalyst and then tends to foster positive performance. Typically when you breakout, you do see follow-through." Wald said on a rolling three month basis, if the Russell is positive, 92% of the time the S & P 500 has been positive as well. "If small caps manage to break out above that high, it will mark an end to an over six-month period of consolidation that followed a very strong run at the end of 2020 and early 2021," notes Bespoke. Once the Russell 2000 closes at a new high, Bespoke says it typically does well in subsequent months. The firm found 22 instances where the small cap index closed higher after six months. On average the Russell was 9.3% six months later. it was up 0.9% a week later, and 3.6% three months later. But Bespoke also sees a warning in the Russell 2000 chart. The index has become extremely extended in price to its 50-day moving average and that could work against the index.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, October 6, 2021.

Brendan McDermid | Reuters

Small caps are a step closer to the breakout that many strategists have been waiting for, and that could signal more broader market gains.