Following a remarkable rally that has lifted small-cap stocks out of historically cheap levels, there are indications that these stocks are on the brink of a significant breakthrough in the new year. This breakthrough is known as a “golden cross” on the price charts, which could potentially lead to even more gains for investors.
The Russell 2000 Index: Approaching the Golden Cross
The Russell 2000 (RUT), a benchmark index for small-cap stocks in the US, is currently on the verge of experiencing a golden cross. Analysts from Renaissance Macro recently pointed out in a note to their clients that this is due to the fact that the 50-day moving average of the index is approaching its 200-day moving average.
According to FactSet data, as of Tuesday’s close, the Russell’s 50-day moving average was only 15 points away from its 200-day moving average, which stood at 1,824.68. It’s worth noting that the index is already trading well above both moving averages after experiencing a significant rise of over 23% since November 1. On Tuesday, the index saw a further increase of 1.2% and closed at 2,059.19.
The Significance of the “Golden Cross”
In technical analysis, the 50-day moving average (DMA) is widely followed and serves as a short-term trend tracker, while the 200-day moving average (DMA) is seen as a dividing line between longer-term uptrends and downtrends. The golden cross, which occurs when the 50-DMA crosses above the 200-DMA, is often considered a confirmation of a positive shift in the long-term trend of an asset.
As small-cap stocks continue to rally and approach this golden cross, investors eagerly anticipate potential further gains in the market. With the new year just around the corner, all signs point to a promising future for the small-cap stock sector in both Europe and the US.
European Small-Caps Show Strong Performance
The iShares MSCI European Small-Cap ETF IEUS has experienced a significant rise, closely following its American counterparts. Tracking a market-cap weighted index of European small-cap stocks, the ETF has surged by nearly 20% from November 1st to Tuesday’s closing, according to FactSet data.
Closing at $56.19 per share on Tuesday, the ETF’s 50-day moving average is only $1 away from its 200-day moving average, which is currently at $52.15. This convergence of averages highlights the remarkable turnaround in performance over the past two months.
Promising Signs for Small-Cap Stocks
In contrast to its lowest point relative to the technology-heavy Nasdaq-100 NDX, which occurred just two months ago, the Russell 2000 has since bounced back. This positive development, as reported, signals encouraging prospects for small-cap stocks.
The upward trend in small-caps can be attributed to various factors. Many struggling sectors in the U.S. market have witnessed substantial gains due to expectations of potential interest rate cuts by the Federal Reserve in 2024. Additionally, hopes for a “soft landing” for the U.S. economy have also contributed to the boost in small-cap stocks, as noted by analysts.
However, some market observers have labeled the recent gains in the Russell 2000 and the ARK Innovation ETF ARKK as a “dash for trash.” This term refers to a speculative frenzy driven by investors’ optimism regarding potential rate cuts.
Proceed with Caution
While the current market conditions may tempt investors to seek out bargains among small-cap stocks, it is advised to exercise patience and wait for further developments before making any significant investment decisions.
Read Also: Tempted to go bargain-hunting for small-cap stocks? Why you might want to wait.
The market landscape remains unpredictable, and it is essential to stay informed and monitor developments closely.
