New World, New Rules

To better understand today’s market, we have to go back a couple years…

The bull run from late March 2020 to December 2021 was one for the ages.

Practically anything you bought would have done well.

It wasn’t a matter of picking a winning investment, but rather picking the hottest investment you could. Cryptocurrencies, SPACs, NFTs, and stocks all delivered massive gains.

Small-cap stocks were no exception either. Over that same period of time, the Russell 2000 Index rallied over 155%. The combination of rock-bottom interest rates and a steady stream of freshly printed dollars was like putting our financial markets on steroids.

Of course, all that came to an end in 2022…

Inflation came roaring back. This, in turn, forced the Fed to reverse course on their easy-money policies.

Bitcoin dropped nearly 80%. The S&P 500 dropped nearly 28%. SPACs all but disappeared.

It’s a new world out there for investors now. And that means new rules.

There’s still some uncertainty around how high interest rates will go… not to mention how long they’ll stay elevated.

But for now, uncertainty is the name of the game. That means the markets are likely to be a bumpy ride for many buy-and-hold investors.

A perfect example is small-cap stocks. And while I’ve spotted a potential bullish opportunity in the S&P 500, the Russell 2000 still looks like it needs to break lower first.

Let’s take a look…

There are three key technical indicators here, the 20-, 50-, and 200-period moving averages.

These three moving averages highlight the short, medium, and long-term trends in the market.

Notice how prices have traded below all three moving averages. That’s a clear sign the trend is to the downside.

Another piece of bearish evidence is that prices broke below an important support (blue line). This trend line has been a supportive floor for the market since June 2022. Breaking below that line is another sign that investors are still bearish on small-cap stocks.

It’s certainly possible that the Russell will pop higher for a few trading sessions. But any rally should fail and ultimately draw the index to fresh lows.

For now, traders should avoid getting into stocks that make up the Russell 2000 Index.

My downside target is around 1510. So, there should be another 14% decline before the index can stabilize and rebound.

Happy trading,

Imre Gams

Are you watching the Russell 2000 Index?

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