US small caps making a break higher?

3:47 PM September 11, 2019


  • US2000 breaks above resistance at 1534

  • Small cap index has been lagging large caps 

  • US PPI beats forecasts


While the attention for US indices often falls on the large cap benchmarks (US500, US100, US30), the small caps (US2000) can provide further insight and are seen by some as a better proxy on the domestic economy. Yesterday was a mixed day for the large cap markets, with some early weakness subsiding and a bid into the close on more hopes of an improvement in the US-China trade relationship saw the benchmarks end the day little changed. The small caps however were stronger throughout and managed to post an impressive daily gain, and in doing so cleared the prior resistance level around 1534.


The Russell 2000 rallied to its highest level since July yesterday, and has extended further this morning. Price is now back above the 1534 resistance level. Source: xStation


The correlation between large and small caps has been weakening over the past 12 months with the former outperforming the latter. This could be seen as unusual given that larger multinational firms are more exposed to the US-China trade tensions. One explanation for this could be that smaller firms are more sensitive to economic developments and are therefore feeling the impact of a slowdown more keenly, while money managers may be also less reluctant to invest in the space. Either way, a notable divergence can be observed and S&P500 bulls would like to see further gains in the Russell to support the strength seen in their own market.      

The divergence between the US500 and US2000 could be seen as a warning sign for US500 bulls. However, they will have been pleased to see the US2000 make a break higher yesterday. Source: xStation


While Thursday’s CPI data is more of a market mover, the recent release of US inflation data has perhaps set the scene against which tomorrow’s will be viewed. The PPI Y/Y for August rose to 1.8% from 1.7% prior with the consensus calling for another reading of 1.7%. A core reading, that strips out the effects of food and energy rose to 2.3% Y/Y, from 2.1% prior. These rising inflation figures will not be welcomed by the Fed who are expected to not just cut rates later this month but also a couple more times before year-end. If we get a similar reading in tomorrow’s CPI then the calls for a less dovish stance amongst rate setters will grow a little louder.

The decline in PPI readings may be coming to an end with both the headline and core ticking higher in August. Source: XTB Macrobond



The content of this report has been created by X-Trade Brokers Dom Maklerski S.A., with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. X-Trade Brokers Dom Maklerski S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.