- A bullish rotation in play towards US small-cap Russell 2000 aided by the US Treasury yield curve bull steepener and potential revival of “Trumponomics”.
- Potential outperformance of Russell 2000 over Nasdaq 100 in the medium term.
- Watch the 2,146/108 key medium-term support on the Russell 2000.
The DJIA has managed to clear above its 40,030 intermediate range resistance and hit a fresh all-time closing high of 40,2011 on Monday, 15 July. It’s fourth all-time record close this year versus the S&P 500 that recorded its 38th record close for 2024 on Monday.
Hence, the laggard DJIA has started to play catch-up to cover underperformance against the S&P 500 and Nasdaq 100 as the US Treasury yield curve starts to shape a bull steeper; the Russell 2000 has fallen at a faster pace than the drop seen on the Nasdaq 100 in the past two weeks.
A Rebirth of “Trumponomics” Fueling a Bullish Shift into Russell 2000
Fig 1: 2024 YTD performance of major US stock indices with mega-cap stocks as of 15 Jul 2024 (Source: TradingView)
Another laggard among the major benchmark US stock indices is the small-cap Russell 2000, which has not yet made a fresh all-time intraday high or closing high since November 2021.
The Russell 2000’s current year-to-date performance as of Monday, July 15, stands at 8.66%, a significant improvement from last Thursday, 11 July YTD performance of 5.58%.
The Russell 2000 comprises small-cap listed companies that derive most of their revenue domestically in the US, making it a bellwether for the US economy reflecting smaller companies focused on the domestic market.
The return of Trumponomics policies amid speculation of Donald Trump winning the upcoming Presidential Election may lead to tax cuts and subsidies benefitting small to medium US-focused firms, enhancing their profitability prospects and boosting sentiment towards the Russell 2000.
Bull Steepening of the US Treasury Yield Curve Easing Russell’s Debt Burden
Fig 2: Ratio charts of Russell 200 & DJIA over Nasdaq 100 as of 15 Jul 2024 (Source: TradingView)
Russell 2000’s underperformance against S&P 500 is attributed to weaker pricing power, lower margins, and weaker balance sheets of US small-cap firms in high inflation and high-interest rate environments. Around 40% of Russell 2000’s debt is on a short-term floating rate structure, significantly higher than S&P 500 firms.
The recent US inflation data has shown clearer signals of core and services inflation decelerating, shifting Fed Chair Powell’s rhetoric towards a dovish tilt, leading to a more significant drop in the 2-year US Treasury yield compared to the 10-year yield, potentially reducing debt burden costs for Russell 2000 firms.
Bullish Momentum Indicated by the Ratio Chart of Russell 2000/Nasdaq 100
The 20-week rate of change indicator of the ratio chart of Russell 2000 over Nasdaq 100 points to a bullish divergence condition, hinting at a reversal of Russell 2000’s underperformance trend against Nasdaq 100, particularly led by a previous steepening of the US Treasury yield curve.
A break above the critical threshold may trigger a bull steepening scenario, potentially leading to Russell 2000 outperforming Nasdaq 100 and S&P 500.
Positivity from a 2-Year Range Breakout
Fig 3: US Russell 2000 major & medium-term trends as of 16 Jul 2024 (Source: TradingView)
The recent bullish breakout from a 2-year range by the US Russell 2000 CFD Index indicates a potential medium-term uptrend initiation. Holding the key support at 2,146/108 could propel the Index towards retesting its all-time high range and further medium-term resistance levels.
A drop below 2,108 may signal a failed breakout, leading to corrective downside movements aiming at the next support at 1,920.
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