Prospects for RUSSELL 2000:
- Cyclical low-capital relief could materialize if the economic recovery stabilizes
- Reaching out to small businesses could raise Russell 2000 higher in the medium term
- The Bullish Russell 2000 thesis was played through the IWM ETF
Inflation can be positive for small capital and cyclical companies if it is accompanied by strong economic growth. However, when inflation heats up, it is supply-side and economic activity begins disappointing, small businesses do not tend to perform well because rising price pressures are quickly eating away at profit margins.
In early summer, when the US consumer price index reached its highest level and fears of the delta variant led to declining output, the ghost of “stagflation” began to intimidate investors, prompting traders to reduce exposure to cyclical stocks. This fear, whether justified or not, was probably responsible for the poor performance of Russell 2000 in recent months (Russell 2000 is a cyclically oriented small capital index).
The good news now is that inflation seems to be easing after the uploaded reading at the beginning of the year. This dynamic can ease the pressure on margins and create a friendlier setting for small pricing with little pricing.
Winflationary pressures losing some momentum, may soon turn to cyclical and small businesses again, a scenario that will benefit Russell. Bullish’s thesis, however, is based on the assumption that recovery is stabilizing and the labor market will fix in the coming months.
Investors and consumers have become too gloomy about the economy as a result of the COVID-19 wave caused by the latest delta, but the pessimism is wrong, as the health crisis does not go beyond effective vaccines and wider vaccinations.. In this context, it is important to note that infant vaccines will be approved at the end of October. This should further improve the situation.
Looking at the fourth quarter, the news cycle should be dominated by encouraging stories of a reduction in coronavirus cases, boosting consumer confidence and household spending. This, in turn, should be good news for the labor market and GDP (As a side note, consumers maintain a healthy balance sheet and, according to JP Morgan, excessive savings of ~ $ 2.4).
Although we do not respond to the outstanding results achieved in the first and second quarters, when fiscal stimulus was in full swing, the economy should continue to expand at a healthy pace. True, slower growth may mean lower returns on equity, but the macroeconomic environment, the Fed’s flexibility and the out-of-trend expansion forecast until 2022 are still in line with positive earnings per share and cyclical easing. This may leave Russell 2000 in a good position cruise higher in the medium term, but any upward move is unlikely to give an explosive momentum at the height of cyclical optimism earlier this year.
IWM – RUSSELL 2000 PROX
One way to trade stock indices is through ETFs. Looking at Russell 2000, the IWM ETF monitors its performance and is typically used as a proxy for a small capital index.
Focusing on IWM’s recent pricing, we see that EFT is approaching its 200-day moving average and Fibonacci support close to 218 (38.2% Fibi retracement in 2021). In this area, buyers could regain control of the market and move to the September peak of 230. If this technical barrier is removed, IWM could be on its way reached its record level close to 235.
If the IWM continues its recent withdrawal and falls below 218, the bullish path could be temporarily unraveled, at least from a technical point of view. Under this scenario, EFT may move to the next grant-210 in the near future (lowest time in August).
IWM TECHNICAL TABLE
EDUCATIONAL INSTRUMENTS FOR TRADE
– Written by DailyFX market strategist Diego Colman