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Russell 2000 Index

The Russell 2000 Index is a small-cap stock market index that tracks the performance of 2,000 small-cap stocks in the Russell 3000 index. The Russell 2000 is the most common benchmark for mutual funds that identify themselves as “small-cap”, while the S&P 500 index is used primarily for large capitalization stocks.

Due to the fact that small-cap stocks are often high risk growth stocks of newer companies, they have a tendency to perform better in a risk-on market where greed is the primary psychological driver. Conversely, in a risk-off market, small-cap stocks tend to perform worse than mid-cap and large-cap stocks. For this reason, the Russell 2000 is an excellent leading indicator and studies show that it often leads the other major indices both higher and lower.

Healthy Bull markets usually have the Russell 2000 leading the other major indices higher. An absence of Russell 2000 leadership in a Bull market should call into question the underlying strength of the Bull market.

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