SD Exclusive: From crashing in early 2018 to super bullish now, but these fundamental and technical factors say be very, very careful here…
Yes I’m bringing up the Russell 2000.
For those who don’t know what the Russell 2000 is, here’s investopedia:
The Russell 2000 index is a commonly used benchmark for mutual funds that identify themselves as “small-cap,” much like the S&P 500 index is used to benchmark large capitalization stocks. Mutual fund investors favor the Russell 2000 index because it reflects the investment opportunity presented by the entire market rather than opportunities offered by narrower indices, which may contain bias or more stock-specific risk that can distort a fund manager’s performance. Many mutual funds and ETFs are tied to or based on the Russell 2000.
Many regard the Russell 2000 as an important bellwether of the American economy because it measures the performance of smaller, domestically focused businesses. The Russell 2000 index is investable by replicating the index using component shares or through index futures, mutual funds, and exchange trading funds, such as the Russell 2000 index ETF.
In other words, the Russell 2000 are small (but not “mom-n-pop” small) American-centric businesses.
You could say the Russell 2000 is like that old Chevy slogan “the heartbeat of America”.
I think the Russell 2000 is going down.
Now I’ll be the first to admit I’m a stock market bear, but, everybody is all of the sudden uber-bullish on the Russell 2000, so much so that we could be in for a correction or worse, very, very soon.
Chris Vermeulen, who we feature regularly, has just said this about the Russel 2000 (bold mine for emphasis, and IWM is a Russell 2000 tradeable ETF):
Therefore, should the upside trend expand as we expect, we believe the upside potential in the IWM to be at least 15~20% higher from these current levels.
Chris is a technical analyst.
And I’ve heard it time and time again, more so for gold and silver, but if we assume all markets are manipulated, which I do, then it applies here.
The thing I hear all the time is “Half Dollar, but technical analysis is useless in a rigged market”.
I don’t think technical analysis is useless, but let’s assume it is.
So what about the fundamentals?
The outlook is still very bullish.
Kevin Muir, another analyst who we feature regularly, recently said this about the small caps in general and the Russell 2000 specifically::
I am unsure how to reconcile the difference between macro data and the anecdotal information. Yet a little part of me worries that it is too easy to simply dismiss the reports from boots on the ground as not “hard data”. I have long liked the small-cap value trade (Value vs. Growth: Decade Long Pause Provides Great Entry), and this only encourages me all the more.
Kevin is taking in the fundamentals and becoming encouraged by the price action in the Russell 2000.
In other words, both Chris Vermeulen and Kevin Muir are pretty bullish on the small caps.
“But Half Dollar, you said everybody”.
Here’s another –
Over at the Daily Reckoning is this title: Small Stock Are Set For BIG Gains.
And yes, the word “BIG” was in all-caps.
Here’s some of the text from that article (again, bold mine added for emphasis):
This is the Russell 2000 small cap index. It’s an index made up of 2,000 smaller companies listed on the U.S. exchanges. And as you can see, this small-cap index hit a new high yesterday after recovering nicely from the volatility earlier this year.
As an investor, I’m always looking for ways to grow the value of my account.
But smaller companies can have some tremendous advantages when it comes to growth opportunities.
So as you can see, the picture is becoming rather clear.
If we put together the pieces of the puzzle. If we connect the dots. Or if we do whatever cliche you would like to add, then we can arrive at one conclusion –
Nearly everyone is bullish on the Russell 2000.
“But Half Dollar, you only gave us three specific examples, and three is not everybody”.
Okay, now you’re nit-picking.
The point is that the sector is overly bullish, and we know what that means.
When everybody is on the same side of the trade, and when everybody is betting in the same direction, that only lasts for so long, and the reversal can be dramatic.
So let’s look at the Russell 2000 on the charts.
First, the zoomed out monhtly chart:
Now, I’m not sure about you, but the last several years look like one big melt-up in the making.
All the Hopium inhaled under Obama, and now the MAGA hype under President Trump, has been real good for America, right?
I’m sorry, but I just don’t see it.
And like those boots on the grounds Kevin wrote about, I too have had boots on the ground in America.
Between 2013 and last year, I zig-zagged all over the United States – From Texas to Los Angeles. to Orlando and back again. I’ve gone from Texas to NY and over to Detroit.
Even have driven extensively in Juarez, Mexico and a couple times in Canada.
This is driving mind you.
And I’m here to tell you, after all I have seen in the last few years and all I’ve experienced, the United States is a downright pathetic disaster.
A slow moving train wreck.
Held up with bubble gum and duct tape.
Again, insert your own cliche here.
To get an idea of what I’m talking about, see this awesome video (not awesome on the subject, just awesomely made) from Truthstream Media.
They call America being “haunted”, but It’s the same thing I’m talking about in that Main Street is not doing well, not doing well at all:
That’s what I’m talking about, and that’s why I think the Russell 2000 is set for a correction or a big drop soon.
But it’s not just the fundamentals.
So back to the charts.
Here’s a daily chart in which we can see the index really took off since early 2016:
Now, it’s not as melt-uppy as in late 2016, but since then, it has been on a daily grind higher, and the move is really starting to accelerate.
Zooming in to the daily chart of just the last year, we can see those extremes more clearly:
The technicals are peaking and right on the cusp of turning bearish.
First of all, since May 1st there have been only six down days. Secondly, the Relative Strength Index (RSI) is quickly becoming “overbought”. Finally, the Moving Averages Convergence – Divergence (MACD) has been in the green for a very long time.
So we can see the technicals are set up for an epic, melt-up and blow-off top, or this thing is gonna roll over before then.
To recap the fundamentals: There is just too much bullishness in the Russell 2000 right now, and I think it’s about to correct, or worse, and soon, because this extreme bullishness is in contrast to what Main Street America fundamentals have shown me, and have shown me not just recently, but for years, through my own direct “boots on the ground” experiences across the entire nation.
Paradoxically, our deteriorating nation in a state of decline corresponds to the multi-year run-up in the market index that is supposedly the gauge of Main Street America.
The index is telling you that “everything is awesome”.
I’m saying that America is in very bad shape.
But like I said, I’m a stock market bear.
And now a very lonely one too.
– Half Dollar
About the Author
U.S. Army Iraq War Combat Veteran Paul “Half Dollar” Eberhart has an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill. Paul dived into gold & silver in 2009 as a natural progression from the prepper community. He is self-studied in the field of economics, an active amateur trader, and a Silver Bug at heart.