EVERYTHING IS GREEN, EXCEPT RUSSELL 2000. I TELL YOU WHY.

Okay, it is only my view and maybe I am wrong. I have two arguments why there is huge divergency, while SP500, DJIA and Nasdaq are rallying, but the Russell 2000 is lagging behind. For instance just yesterday US markets are performed like this:

• S&P 500 +0.8%
• Dow +1% 
• Nasdaq +0.9%
• Russell 2000 +0.5%

The Russell 2000 index swung wildly yesterday and finally managed to close slightly higher, but only made 50% the gain of other US indices. Why? Here are my hints below.

1. Firstly, the Russell 2000 is the most people’s favorite small-cap benchmark — they understand better, so this is really the small retail clients arena and product. Their sentiment turned mostly bearish and having huge concerns about the market. So when the pros are buying the SP500, DJIA and Nasdaq the Russell is mostly sold by the rookies and housewife.

2. Secondly, the Russell 2000 went to much up last year and after that huge and strong rally needs to consolidate for a while. In the long-term the enormous arbitrage gap between the DJIA and Russell 2000 needs to get closer or being closed. It needs to be done time by time, the only question is when occurs. So DJIA needs to catch up in the following weeks and Russell needs to consolidate or being flat.

Those points don’t mean we are short on Russell 2000, not at all. We just started to buy again Russell 2000 because it is a good bargain.

The BFM Assets Team.