EC After Big 1-Year Gains, Small-Cap Investors Are Itching To Cash In

One year ago this month, amidst all the gloom and doom, small-caps bottomed. Now, amidst high optimism for GDP and earnings growth, sellers are itching to cash in on their massive gains.

After a massive one-year rally, small-caps look ripe for a correction at best and worse at worst. The Russell 2000 surged 144 percent between the low of 966.22 on March 18 last year and the high of 2360.17 on the 15th this month.

Through Wednesday, the small cap index is down 9.6 percent from that high. Earlier, between February 10 and March 5, it shed 10.1 percent before regaining its footing; but the rally that followed just about stopped at the underside of a broken ascending channel from last October-November (Chart 1).

There was short-term horizontal support at 2150s, which, too, has been breached, albeit slightly. Just underneath, there is another layer of straight-line support at 2070s-2080s. A loss of this can swing momentum to bears’ favor – timing and magnitude notwithstanding.

The index (2134.27) has lost the 50-day (2217.61). This was the first time it closed under the average since last October.

Small-caps’ wobbly action is coming at an interesting time.

Last year, these stocks – and large- and mid-caps as well – bottomed in the throes of COVID-19 disruptions. Now, sellers are showing up even as the US economy is expected to boom this year, with growth slowdown in subsequent years. At the end of last week’s meeting, the FOMC revised higher its 2021 real GDP forecast from 4.2 percent last December to 6.5 percent; 2022 growth is then expected to soften to 3.3 percent and 2023 to 2.2 percent.

Earnings portray a similar trajectory. Operating earnings estimates for S&P 600 companies are expected to come in at $59.71 this year – a massive reversal from a loss of $3.97 last year. The momentum is expected to continue next year but with deceleration, with the consensus penciling in $73.32 (Chart 2).

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