Russell 2000 Index Extreme Trend for Small Cap Stocks

This month we discuss the extreme move in the Russell 2000 index of small cap stocks, investor positioning, China’s central bank policy and the gold price decline. We remain focused on our economic and monetary indicators for investment allocation guidance. Despite some early warning signs from investor positioning and China’s central bank policy, the continued strong economic outlook combined with a committed Federal Reserve and benign inflation readings, our equity ratings remain bullish along with commodities and gold. Long-term bonds remain at a cautious 1 rating, due to the asymmetrical risk presented by low interest rates.

Russell 2000 Index Extreme Trend for Small Cap Stocks

The Russell 2000 index of smaller cap stocks is up 14.6% YTD, not far ahead of the 13.4% gain for the S&P 500. However, from the March low, the Russell 2000 rallied 93% to December 10th, putting it close to a record 31% over its 200-day average. Following the 7 prior extreme Russell 2000 Index moves, returns were mixed 3 months out. However, 6 months out, 6 of 7 cases were higher an average of 9.8%, and the next 10% move was higher in 6 of 7 cases too. With economic and monetary indicators still positive, a 5-10% reversion to the downside within 3 months would be typical, but 6 months out the Russell 2000 historically has been higher.

Chart 1: Russell 2000 Index Extreme Move: 5-10% Reversion Typical

Investor Positioning is Long

Equity markets rallied in November after the U.S. election process was better than expected and following 90% vaccine efficacy announcements. Equity investor positioning moved higher in response. All 10 investor groups we follow are now long, and 6 of those are extreme. However, tests show overall positioning is not significant for equity returns in the fourth quarter. However, if positioning continues higher, we will reassess the implications in the first quarter of 2021.

Chart 2: Equity Investor Positioning is Long 6 of 10 Groups Extreme

China’s Monetary Stimulus Slowing

Foreign central banks like China’s PBoC joined the U.S. Federal Reserve in easing monetary policy since March to stimulate their economies. For instance, China loan demand increased rapidly to 85% Y/Y in August. However, it has since slowed to 59% in November. In prior cases the growth rate rolled over, China’s economy slowed in response. It could be meaningful for industrial commodity prices like copper, which benefit from China’s economic strength. We are maintaining our bullish 5 rating on commodities, but this apparent shift is a reminder that the unprecedented pace of global central bank easing is unsustainable, and that central banks will not maintain easy monetary conditions indefinitely.

Chart 3: China’s Monetary Stimulus Slowing

Gold Down 14%: Positive

Through the end of November, gold declined 14% to below $1,800 from the August peak of over $2,000, but was still up 16% YTD. This move was similar to prior bull market reversals after previous extremely overbought markets like we saw in August. Short term interest rates below the inflation rate (also called negative real interest rates), unprecedented money printing by the Federal Reserve, and a reversal in our leading inflation indicators are bullish for gold. The gold bull market will likely not end until the Fed hikes. Finally, since 2000, gold returned an average of 5.7% from December 15th through February, and it was higher 75% of the time. So there might be some structural buying that will take place this time of year. We are maintaining our bullish 5 rating on gold.

Chart 4: Price of Gold


The extreme move in equities since the election may lead to consolidation in the strongest indices like the Russell 2000, like we saw in gold since August with a 14% 3-month decline. However, since the economic outlook remains positive and the Federal Reserve remains committed to easy monetary policy, we are maintaining our bullish 5 rating on equities. The dollar decline will benefit both commodities like crude oil and foreign equities like emerging markets and foreign developed indices. We will continue monitoring our array of indicators and testing our assumptions on a daily basis. Thank you for your support and we wish you good health this holiday season. Please contact your advisor with any questions.


This review and outlook report (this “Report”) is for informational, illustration and discussion purposes only and is not intended to be, nor should it be construed as, financial, legal, tax or investment advice, of Brenton Point Wealth Advisors LLC or any of its affiliates (“Brenton Point”). This Report does not take into account the investment objectives, financial situation, restrictions, particular needs or financial, legal or tax situation of any particular person and should not be viewed as addressing any recipient’s particular investment needs. Recipients should consider the information contained in this Report as only a single factor in making an investment decision and should not rely solely on investment recommendations contained herein, if any, as a substitution for the exercise of independent judgment of the merits and risks of investments.
This material is based upon information obtained from various sources that Brenton Point believes to be reliable, but Brenton Point makes no representation or warranty with respect to the accuracy or completeness of such information. Views expressed herein are current only as of the date indicated and are subject to change without notice.
This Report contains certain forward looking statements opinions, estimates, projections, assessments and other views (collectively “Statements”). These Statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward looking statements and projections. Brenton Point makes no representations as to the reasonableness of such assumptions or the likelihood that such assumptions will coincide with actual events and this information should not be relied upon for that purpose. Changes in such assumptions could produce materially different results. Past performance is not a guarantee or indication of future results, and no representation or warranty, express or implied, is made regarding future performance of any financial instrument mentioned in this Report.
Any benchmark shown herein is shown for illustrative purposes only. No index benchmark is available for direct investment. It may not be possible to replicate the returns of any index, as the index may not include any trading commissions and costs or fees, may assume the reinvestment of income, and may have investment objectives, use trading strategies, or have other materials characteristics, such as credit exposure or volatility, that do not make it suitable for a particular person. This is not an offer or solicitation for the purchase or sale of any security, investment, or other product and should not be construed as such. References to specific financial instruments and to certain indices are for illustrative purposes only and provided for the purpose of making general market data available as a point of reference only; they are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities. Investing in securities and other financial products entails certain risks, including the possible loss of the entire principal amount invested, as the value of investment can go down as well as up. You should obtain advice from your tax, financial, legal, and other advisors and only make investment decisions on the basis of your own objectives, experience, and resources.
Brenton Point accepts no liability for any loss (whether direct, indirect or consequential) occasioned to any person acting or refraining from action as a result of any material contained in or derived from this Report, except to the extent (but only to the extent) that such liability may not be waived, modified or limited under applicable law.
This Report may provide addresses of, or contain hyperlinks to, Internet websites. Brenton Point has not reviewed the linked Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for your convenience and information, and the content of linked third party websites is not in any way incorporated herein. Recipients who choose to access such third-party websites or follow such hyperlinks do so at their own risk.
All marks referenced herein are the property of their respective owners. This Report is licensed for non-commercial use only, and may not be reproduced, distributed, forwarded, posted, published, transmitted, uploaded or otherwise made available to others for commercial purposes, including to individuals within an institution, without written authorization from Brenton Point.
Source of data and performance statistics: Bloomberg L.P. and Factset Research Systems Inc.
©Brenton Point Wealth Advisors LLC 2020

Brenton Point - Careers

Michael Schaus

Director of Market Research

Michael Schaus is the Director of Market Research for Brenton Point Wealth Advisors and Zweig-DiMenna. Since joining Zweig-DiMenna in 1992, his focus has been on macroeconomic research, the analysis of…


Check out our services!


Download PDF


Sign up!

Sign up for our monthly newsletter and get the lastest news and research from our esteemed advisors here at Brenton point. Right into your inbox!