A small-cap ETF pegged to the Russell 2000 has rallied to a fresh record high while funds tied to blue-chip indices such as the S&P 500 and Dow remain a few percentage points shy of their all-time peaks.
In terms of performance, iShares Russell 2000 (NYSEArca: IWM) is slightly trailing large-cap U.S. stocks in 2012. Yet it has gained ground recently against large-cap peers.
The small-cap ETF was up 17.5% year to date as of Sept. 17, versus an 18% total return for the S&P 500, according to Morningstar.
The Russell 2000 has broken out to all-time highs while the Dow and S&P 500 are within 6% of making new highs, according to Piper Jaffray technical analyst Craig Johnson.
“However, sentiment toward stocks remains unusually depressed,” he wrote in a note this week.
“In the wake of QE3, U.S. 10-year bond yields actually rose, making a higher high after recently making a higher low, suggesting that at least in the short/intermediate-term that rates are poised to go higher and that money may be starting to come out of fixed income securities and the Great Equity Rally may be shifting into a higher gear,” he added. “Given the broader market’s recent topside breakout to new highs for the year, we suspect more upside lies ahead.”
The relative strength that is appearing in small-cap stocks as of late coupled with sizable inflows in long ETFs linked to the Russell 2000 is bullish for the overall market, says Paul Weisbruch at Street One Financial. [ETF Chart of the Day: Small-Cap Russell 2000]
“Strong bull markets tend to be characterized by leadership and outperformance in small-cap stocks as money grows more confident about the future and positions for higher risk with higher return potential,” writes Pension Partners chief investment strategist Michael Gayed at MarketWatch. [Small-Cap ETFs Win Big]
Still, some technical analysts warn that the Russell 2000 needs a sustained breakout for the overall market to follow.
Currently, the Russell 2000 and the other major indices are “in an eerily similar setup that shows the same price divergences” as in 2007 before the market crashed on the subprime crisis, writes Jason Cimpl at Wyatt Investment Research. “Keep a watchful eye on the Russell 2000 this month.”
iShares Russell 2000
Full disclosure: Tom Lydon’s clients own IWM.