The weight of the evidence in small caps keeps pointing in the same direction: higher.
The Russell 2000 just posted its third straight monthly close at new all-time highs, and when you break it down sector by sector, the underlying strength becomes obvious.
These aren’t downtrends hiding inside the small-cap indexes. They’re clean uptrends… or big, healthy bases forming within longer-term uptrends.
And when most stocks inside an index are rising, it’s awfully hard for the index itself to go down.
New All-Time Highs Again
Here’s the Russell 2000, an index that makes up roughly two-thirds of the entire Russell 3000:
And remember, the Russell 3000 represents more than 98% of all investable U.S. equity assets.
So when two-thirds of that universe is breaking out to new all-time highs again, it matters.
A decisive breakout above the 2021 highs in small caps would be a major development for the broader market.
Back then, these indexes were already rolling over.
The deterioration under the surface was obvious, and the weakness only intensified throughout 2022.
This time? We’re seeing the exact opposite.
Go sector by sector… stock by stock: The underlying strength is everywhere.
The Sum of the Parts Adds Up
These are four of the most important sectors in the entire market — and arguably even more critical inside the small-cap universe.
Together, they make up nearly 60% of the entire Russell 2000.
Now look at these charts:
Do they resemble downtrends? Or do they look like uptrends… or healthy consolidations within ongoing uptrends?
Nothing here says “short me.”
Small-cap Technology (PSCT) just closed at new all-time highs. Industrials (PSCI) are pushing right up against theirs.
Financials (PSCF) and Consumer Discretionary (PSCD) are carving out massive bases that look ready to resolve higher.
And then there’s Healthcare, which, at the small-cap level, is basically Biotech. Small-cap Healthcare makes up more than 16% of the Russell 2000, the third-largest weighting in the entire index.
If you looked at my TrendLabs portfolio over the past few months, you’d swear I was running clinical trials in my basement. It’s been Biotech after Biotech after biotech.
But I’m no scientist, just a trend follower listening to what price keeps telling me.
Here’s small-cap Healthcare (PSCH) closing at its highest level since January, with Biotech (XBI) simultaneously hitting its highest level since 2021:
They move almost step for step, and right now Biotech is acting like the engine — and the leading indicator — for the whole group.
Tech, Industrials, Financials, Consumer Discretionary, and Healthcare together make up 75% of the Russell 2000.
The rest is Real Estate (6%), Energy (4%), Materials (4%), Utilities (3%), Staples (2%), and Communications (2%).
None of those look bearish either. Small-cap Materials look fantastic. And small-cap Energy is finally waking up.
This is the weight-of-the-evidence approach.
No fancy math. No magical oscillator. No algorithm needed.
The weight of the evidence is there for anyone who wants to look.
If you take the time to go through the charts, the story becomes pretty clear: strength, not weakness.
Small caps are doing their job. All we have to do is pay attention.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs