This is a very short update on the Russell 2000. We wrote recently in our Markets Outlook for 2017 that the small cap index, Russell 2000, typically considered a ‘risk asset’, looked poised for a bullish cycle. That conclusion was based on intermarket dynamics, i.e. fear peaked in July of this year.
Now there is a high probability of a short term retracement. As indicated in Transportation index bumping into resistance, the TRAN index is also facing a risk of retracing. Note that the Russell 2000 contains quite some small cap transportations companies, so both index are somehow related currently.
The depth of the retracement of the Russell 2000 will provide clues about its new bull market. Ideally, the index retraces to its breakout level, at 1200 points, a higher low compared to the October lows, before it starts climbing higher. If that scenario plays out, the small cap index Russell 2000 will be a strong buy.