Small-Cap Momentum Bullish for Stock Market

On February 25th, a streak of 9 straight up days in the small-cap Russell 2000 index had just been broken by a relatively large decline.

Far from signaling an end to the momentum, in similar historical circumstances, we nearly always saw that index recover the loss, usually very quickly, and it continued to do well over the next month or so.

It has certainly continued that winning pattern lately, and has now been positive 16 out of the past 18 trading days.

In both the short- and long-term, the small-cap index has, in the past, tended to exhibit a continuation of the momentum, and with strong average returns.


This is often a by-product of a market that is emerging from oversold conditions, and buying interest is so eager that we see extreme momentum. And that is one of the strongest buy signals we can encounter.

Whether our current situation qualifies as having emerged from oversold conditions is debatable - we got quite a few of those indications in February, but the index is already trading at a new high.

Similar historical action suggests perhaps a short-term pause, and questionable prospects over the next several months, but at the very least we'll likely see at least one more new high after whatever short-term correction may come.

On average, under similar historical conditions, , the Russell 2000 has gained +2.9% in three months, +6.1% in six months and +20.0% one year later.