The Russell 2000 closed yesterday at the highest level in its history.
That matters.
This index includes 2,000 stocks and represents roughly two-thirds of the Russell 3000, the broadest measure of U.S. equities.
When small-cap stocks are making new all-time highs, it is not a narrow market. It is not fragile. And it is certainly not being driven by just a handful of stocks.
Like we discussed two months ago, the story about weak market breadth was never true. It was sour grapes. Investors complaining about deteriorating breadth simply owned the wrong stocks.
This was never about the market breaking down. It was about rotation doing exactly what bull markets do. And now the evidence is impossible to ignore. The bull market is continuing, and the leadership is expanding.
The Little Guys Are Winning
This market is not being carried by seven stocks, no matter how often that narrative gets repeated.
The easiest way to see that is to stop listening and start counting.
The Russell 2000, an index of 2,000 small-cap stocks, just closed at the highest level in its entire history:
That does not happen in a narrow market. It happens when participation is broad and leadership is rotating.
This is exactly the rotation we are always talking about. It’s the lifeblood of a bull market. Leadership does not stay concentrated forever. Everyone gets a turn.
What makes this even more important is what’s happening elsewhere.
The Nasdaq 100, the index we were told was the only one going up, has not made a new high since October. It was actually down yesterday, on the same day small caps were printing fresh all-time highs.
Look at the ratio between the Russell 2000 and the Nasdaq 100. It’s now at its highest level since April:
This is not small caps playing catch-up.
This is small caps leading.
Just Built Different
To understand why small-caps are working now, you have to understand what’s actually inside the Russell 2000.
Technology is only the third-largest weighting, at roughly 15% of the index.
That’s a completely different setup than the large-cap benchmarks. Technology makes up about 35% of the S&P 500 and more than half of the Nasdaq 100. When Tech stalls, those indexes feel it immediately.
Small caps are not built that way at all.
Health care is the largest component of the Russell 2000, with close to a 19% weighting. There are more than 200 biotech companies in the index alone.
Compare that with the S&P 500, where health care is about 9%, or the Nasdaq 100, where it barely reaches 5%.
Financials matter too. The Russell 2000 includes more than 240 regional banks, which makes it far more sensitive to domestic growth and credit conditions.
The Nasdaq does not have a single bank. By design, it removes them entirely. The Nasdaq 100 fact sheet spells it out clearly. It only includes “non-financial companies.”
Small caps are diversified differently. They behave differently. And, in the right environment, they outperform differently.
Those differences hurt them when leadership is narrow and growth is scarce. In the current environment, they’re doing the opposite. They’re a tailwind.
Rotation is not a theory. It is the lifeblood of every bull market.
And, right now, the rotation is unmistakable. The market is handing the ball to small caps, and they are running with it.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs