While stocks and index ETFs have been consolidating recently, some analysts are seeing signs of a summer rally in the Russell 2000.
After charging in front of the S&P 500 earlier this year, growth stocks, as measured by the Russell 2000 have begun to slow their pace, largely consolidating over 2021.
The iShares Russell 2000 ETF(IWM), which contains many of the same stocks as the small cap-focused Russell 2000, has shed over 1% this month, while large cap stocks have crept higher.
According to Ari Wald, head of technical analysis at Oppenheimer, there are certain seasonal and historic trends that suggests now could be a critical time to monitor the funds with growth stocks, as the Russell’s next moves could also predict broader market performance for the rest of the year.
“We note that seasonals are a tail wind through July, for the first part of the summer, and we think that the market has already endured an internal consolidation that really dates back over the last three months,” Wald told CNBC’s “Trading Nation” on Monday. “It’s almost as if the internals have coiled and truth be told that spring could uncoil in either direction.”
Watching how the Russell 2000 reacts could offer indications as to whether that move is higher or lower, he added.
“Our expectation [is]for a summertime rally. We’re going to use the Russell 2000 as our signal here. I think [our forecast is]intact as long as the Russell is above its March low at 2,085 support. As long as that’s the case, which it is, rallies should continue and below there would derail our positive view,” he said.
The Russell, which is made up of companies that have roughly $300 million to $2 billion in market capitalization, climbed Tuesday above 2,233.
Some analysts are more cautious of Wald’s predictions for a summer breakout. Boris Schlossberg, managing director of FX strategy at BK Asset Management, would stand aside, even if the Russell makes gains here due to other factors like inflation.
“I’m actually a lot less bullish Russell than I was even a month ago. A lot of that ironically has to do with the fact that I think inflation is really going to wane as we go forward,” he said during the same segment. “As the 10-year yields have come down, it is becoming hard to imagine that all of these small companies that have had their costs rise a lot are going to be able to pass their costs onto the consumer.”
Schlossberg also noted that weaker retail sales data and a lackluster April jobs report may also dampen the Russell’s chances to move higher in the near future. That said, he sees more consolidation, not necessarily a decline.
“It doesn’t mean I think the Russell is going to go down. It just means I think it is going to relatively underperform the Nasdaq. And for me the trade that was long Russell, short Nasdaq is now reversed and that’s how I would be positioned as we go forward,” he added.
For ETF investors looking for Russell vehicles to participate in a potential summer rally, the Vanguard Russell 2000 ETF(VTWO) and Innovator Russell 2000 Power Buffer ETF April Series(KAPR) are two options to consider. Meanwhile, the KFA Small Cap Quality Dividend Index ETF (KSCD) offers small cap exposure with dividend participation.
For more market trends, visit ETF Trends.