The 2020 pandemic hit many companies hard, while other companies took it as a chance to grow, seemingly unaffected by the state of the world around them. NVIDIA (NASDAQ:NVDA) came out as one of those thriving businesses and achieved gains of 122% in 2020. The company’s graphics processing units (GPUs) were present and needed for trends that accelerated exponentially due to the pandemic, boost...
Two charts illustrate how and why the Russell 2000 is strengthening.
The first is a daily chart that compares the price action of the Russell 2000 to the S&P 500 since July 2018. The Russell 2000/S&P 500 ratio—derived by dividing the Russell 2000 by the S&P 500—is on the verge of hurdling a two-year downtrend and climbing from a seven-month base.
The second is a chart of the Russell 2000’s daily advance/decline line since September 2018. What stands out is the positive divergence between the Russell’s breadth and its price action. While the index declined more than 30% from 238 to 162, the advance/decline line registered a significantly higher bottom. In other words, the index was camouflaging that more stocks had begun to turn higher—even as the index itself declined.
Since then, yields have climbed 40 basis points, though the 10-year T-Bond yield has risen just 28 basis points, from 0.56% to 0.84%. (A basis point is 1/100th of a percentage point.) This is important: Since 1990, whenever the Russell 2000 outperformed the S&P 500, the spread between the 30-year T-Bond yield and the 10-year T-Bond yield widened. And since February, the spread has widened by 30 basis points.
It is for these reasons that I expect small-caps to outperform large-caps in the weeks ahead.