Is the Under-Performing ‘Russell 2000’ a Warning for Stocks?

by James DiGeorgia & Geoff Garbacz | 04/14/2021 2:33 PM
Is the Under-Performing ‘Russell 2000’ a Warning for Stocks?

The current head and shoulders formation taking place in the Russell 2000 Index (IWM) would normally indicate big trouble for the overall U.S. stock market. This pattern has in the past lead to market corrections, especially when valuations are very high as they are now.

 

Our favorite Erlanger Charts Indicator appears to be stuck and on the verge of a decline. The small-cap index is not keeping up with the other soaring major indexes; Dow Jones, NASDAQ or S&P. The chart below shows a head and shoulder pattern that could prove to be an early warning signal for the broader U.S. equities market.

 

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This head and shoulders pattern in the Russell becomes of particular concern when the S&P Index becomes toppy.

Admittedly as you can see when the S&P Index hits a short-term top as shown in the chart below with small circles to identify the corrections, the corrections that follow aren’t always big corrections but they’re often are. Consider the corrections that took place in January of 2018, September of 2018 and January through March of 2020. Each of these was signaled first by weakness in the Russell 2000. Caveat Emptor.

 

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