According to Fairlead Strategies market technician Katie Stockton, small cap stocks may be poised for a comeback. Despite the Russell 2000’s underperformance in the early part of this year, Stockton believes that it is only a temporary setback. In an interview with CNBC’s “Fast Money,” Stockton stated, “We’re kind of convinced that we’ll see small caps do better. Maybe they don’t outperform strongly. But a better year for them after what was a very difficult year for them because breadth was so weak.” This insight challenges the prevailing belief that small cap stocks are on the decline.
One of the contributing factors to the current state of small cap stocks is the decline of the Russell 2000 index. While major indices such as the S&P 500, Dow, and Nasdaq 100 have reached new all-time highs, the Russell 2000 is down two percent for the year. Stockton believes that this decline has caused investors to lose confidence in small caps. In an effort to restore that confidence, Stockton notes that there has been an improvement in the relative performance of the Russell 2000 compared to the S&P 500. This improvement suggests that the initial reaction to a short-term oversold condition is subsiding.
Despite the recent decline, the Russell 2000 had a notable fourth quarter rally, with a nearly 14% increase in that period. Stockton highlights the breakout of a major trading range for the Russell 2000 ETF (IWM) during this timeframe. This breakout indicates the potential for a resurgence of small cap stocks. While it may not be as strong as in the past, Stockton’s analysis suggests that this year will be an improvement for small caps following a challenging period of weak breadth.
The analysis provided by Fairlead Strategies market technician Katie Stockton offers a glimmer of hope for small cap stock investors. Despite the underperformance of the Russell 2000 index and the loss of confidence in small caps, Stockton predicts a better year for these stocks. While the future performance may not be as robust as in previous years, the signs of improvement in relative performance and the strong fourth quarter rally provide hope for a potential turnaround. Investors should consider the insights provided by Stockton when making decisions regarding small cap stocks, as the potential for growth in this market segment appears to be on the horizon.
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