Small-cap stocks typically dare rally further and faster than other more-widely held names in an economic expansion on hopes that shareholders will be rewarded for brazen optimism. My chart of the day looks within the Russell 2000 index (RTY) and the percentage of stocks trading above the 200-day moving average.
During 2013, and ahead of the first peak in the small cap index, it was not uncommon to see strong momentum with around 80% of the component members powering the expansion in valuations. When Janet Yellen punched a hole in investors’ optimism in July 2014 and the Russell index was trading at 1208, 70% of its members were above their 200-day movign average. Her reference to over-valuation of social media and biotech stocks marked the start of a 13% market correction during the next three months.
By the time the market reached its bottom, only one-in-four Russell members were left trading above their longer-term moving average. So far, the Russell has fallen by 4.7% from its most recent peak, but you can already see that the all-time small-cap high was driven by considerably weaker momentum with only 68% of members pushing above their 200-day movng average. So far that reading is down to 53%.
Chart sjow percentage of Russell 2000 companies above 200-day moving average slipping.