After Rallying To New High, Extended Russell 2000 Gives Out Subtle Signs Of Fatigue Wed

The Russell 2000 has a parabolic look to it. Post-presidential election and vaccine news, investors are piling into the index. On Tuesday, the index had opened up a 31.1-percent gap with its 200-day – the most ever. Amidst this, Wednesday produced subtle signs of fatigue.

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The Russell 2000 is going vertical. On October 30, a couple of sessions before the November 30 presidential election, small-cap bulls defended horizontal support at 1530s. This Wednesday, the small cap index (1902.15) hit a new intraday all-time high of 1935.27 – up nearly 27 percent in less than a month and a half.

Investors have piled into small-caps post-election and particularly after positive vaccine news from Pfizer (November 9) and Moderna (November 16), hoping the US economy begins to get back to normal next year. By nature, these companies have more domestic exposure than larger-cap companies which also have international exposure.

Investors who have opened up long positions in small-cap stocks are obviously not swayed by the current profit trend, which remains subdued. The NFIB ‘actual earnings changes’ sub-index deteriorated by four points month-over-month in November to minus seven. Things have of course improved a lot from June’s minus 35, but the green bars in Chart 1 have not quite gone hand in hand with the red line.

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Investors are rather focused on next year’s prospects.

As of Wednesday last week, the sell-side had S&P 600 companies earning $55.35, down slightly from $55.60 as of November 27. Granted these analysts expected $64.96 in February this year, but the revision trend has been up since mid-July when 2021 estimates bottomed at $42.99 (Chart 2).

If next year’s numbers come through, this would represent quite a reversal from this year’s expected loss of $5.03. Even here, with one quarter of earnings to go, the revision trend has improved, with an expected loss of $8.35 in late September.

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