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Is the Russell 2000’s new peak a sign of a bullish trend?

The Russell 2000 index: Simple chart showing upward trend

The Russell 2000 index recorded an all-time high of 2,458.85 on 5 November. The index, which is comprised of the 2,000 smallest companies in the Russell 3000 index, has gained just over 9% in the past month alone, giving it a year-to-date rise of 25%, as of 10 November. 

The upward trajectory has got investors asking: Is this a sign of a bigger bullish trend ahead?

Can the Russell 2000 index’s breakout last? 

In October, the Russell 2000 index experienced a slight pullback. At the start of last month, Ari Wald, the head of technical analysis at Oppenheimer, told CNBC’s Trading Nation that the index’s performance – it had been flat throughout the prior eight months – presented a buying opportunity.  

Wald stressed that he needed to see the index break above its March high of around 2,360 – the index was trading at 2,427.29 as of 9 November close. He expects seasonal trends to give small-cap stocks a boost in the fourth quarter. 

“We do think it’s an opportunity, given our view of where we are in the equity cycle… We think we’re about 18 months into what is typically a 30-month cycle, so we think this bull market has further to go,” Wald told CNBC. 

For James Deporre at Real Money, there are a few factors that can help the recent upwards trend continue, according to a note seen by The Street. For starters, the US Federal Reserve has decided to keep interest rates near zero, with chair Jerome Powell indicating that there will be no rush to raise them even once the US government bond-buying programme ends. 

Another factor is that bond yields have also pulled back in the last few weeks. “There is some softening in the economy that is helping to keep this problem contained as well,” Deporre added. 

Earnings season sparks volatility in small-caps 

While there are good signs that the trend will continue, small caps are in the midst of earnings season. As such, several constituents in the Russell 2000 index are seeing price volatility.  

For example, when Bed Bath and Beyond [BBBY] reported a 26% year-over-year decline in revenue for the second quarter of 2021 in September, the share price plummeted. However, the stock bounced back following an announcement of a $1bn share repurchase plan at the end of the fiscal year. The Bed Bath and Beyond share price has rocketed since then – it was up around 36% in the five days to 5 November. 

Meanwhile, biotech stocks have reported mixed earnings for the third quarter. Beam Therapeutics [BEAM] missed revenue estimates, but it incurred a smaller loss than analysts had expected. Intellia Therapeutics [NTLA] also reported a loss and missed revenue estimates. Shares in Beam and Intellia are up 10% and 8%, respectively, in the past month.

And although the stock is down 47% in the year to date, the Desktop Metal [DM] share price climbed 24% on 1 November after the 3D printing company launched its new facility that will help to triple manufacturing capacity. Fellow 3D printing stock ExOne [XONE] rose in unison. 

After the earnings season dust settles, attention will likely turn to whether the Russell 2000 can continue its upward ascent. 

In a note to clients seen by MarketWatch, Andrew Adams, technical analyst at Saul Strategy, said the index’s breakout is a positive sign and expects small-cap stocks to climb higher. However, investors will have to be cautious, he added. It won’t be a smooth ride. There is even the risk of a false breakout, which could be accelerated by large caps trying to keep pace with their smaller counterparts. 

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