Russell 2000 rebalancing fueled outperformance, can it last?

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A second day in a row of tight ranges seen across major US stock indexes except small cap Russell 2000 (more on that later) as the S&P 500 and Dow Jones Industrial Average flirted near all-time highs printed earlier in early May at less than 2% of those levels at 4,238 and 35,091 respectively.

The Russell 2000 outperformed with a gain of +1.06% to close at 2,343; 0.7% from its record 2,360 printed on March 15. Interestingly, its outperformance started to surface on May 25 where it posted a cumulative return of 6.26% to yesterday’s closing level against a meager + 0.93% gain seen on the S&P 500 on a similar period.

The main reasons for Russell 2000’s recent stellar performance can be attributed to two attributions; firstly the next annual rebalancing of the shares of this component by its index compiler FTSE Russell with preliminary updates released on June 11 and 19 and the final changes to the shares of its component will take effect on June 28. Second, the resurgence of equities even over the past week where the share price of AMC Entertainment which has a significant weight in the Russell 2000 jumped + 127% in a single session from June 1 to a new All-time high of 72.62 on June 2 sparked by yet another episode of potential short squeezes.

Positive momentum fuels additional positive momentum at this point for the Russell 2000. Will the golden question on the minds of all traders be the continuation of this bullish trend for small caps? For the rally to be sustainable and translate into another potential major multi-month uptrend phase, the US White House’s additional US $ 4 trillion fiscal stimulus package must begin to gain ground in bipartisan support. to speed up the approval process. in Congress. This modus operandi can strengthen the positive feedback loop on the ongoing thematic game on economic / reflationary stimulus.

The next key factor to note will be the US central bank, the Fed’s guidance on monetary policy. A significant portion of the stocks making up the Russell 2000 have high debt levels and face the risk of leverage if the Fed begins to scale back its quantitative easing program, as this weighs on the negative impact of recent high inflation pressures relative to the current accommodative monetary policy. political position. A reduction in its current bond buying program (quantitative easing) to combat future negative economic repercussions of a high and sticky inflationary environment could trigger a liquidity squeeze and increase the cost of capital for small-cap stocks . Therefore, these two factors are likely to determine the directional bias of Russell 2000 in the coming months after June.

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