In what could be a sign of risk appetite being renewed, small caps are making a comeback as highlighted by the iShares Russell 2000 ETF (NYSEArca: IWM) climbing 4.8% over the past month. Importantly, technical indicators suggest small caps could have more fuel with which to continue leading broader indexes higher.
The small-cap segment has been gaining momentum in recent months, jumping on the risk-on sentiment after the Fed stated it would only hike interest rates two times later this year, or downwardly revised from the four hikes it expected back in December. The extended low-rate environment has also been a boon for smaller companies that have capitalized on cheap debt in their balance sheets.
Small-caps, though, can still navigate through a slowly rising rate environment. Smaller companies, which focus on U.S. markets, are less exposed to a stronger U.S. dollar as rates rise, which would more negatively affect larger corporations with a global footprint. Additionally, periods of rising rates also coincide with expanding economies, which often benefit smaller companies.
“The same rotation trend has continued amid the bounce off of the May lows of a few weeks ago. Among the leaders during this current bounce have been small-cap stocks (riding a nice Russell 2000 Index rally). However, they are currently up against a stiff test of resistance as today’s Chart Of The Day of the Russell 2000 Small-Cap Index (RUT) reveals,” according to See It Market.[related_stories]
The lower reliance on multinational sales has also supported mid-caps. Additionally, the mid-cap segment has provided favorable acquisition targets when cash-heavy large-cap companies are shopping around.