Small caps are breaking out just in time for a summer rally, market watchers say

CNBC

4 hours ago

The summer might belong to the small caps, which are finally showing signs of breaking out. The S & P 500 is back above 6,000, after touching the psychological level at the end of last week in what could be a bullish signal for stocks. But on the Street, market watchers are more interested in what's going on with the Russell 2000 , after its rally last week. The small-cap index jumped more than 3% in June. "We think this could be setting up for 'smallcap summer,'" Jonathan Krinsky, chief market technician at BTIG, wrote Sunday. JC O'Hara, chief technical strategist at Roth, echoed this thought in a Sunday note titled "The Summer of Small?" "We have been closely watching Small Caps as the Russell 2000 started to form an accumulation pattern several weeks ago," he said. "Last week, price was finally able to break out. This sort of formation historically has further upside." .RUT YTD mountain Russell 2000, year to date The Russell 2000 has been punished in 2025, falling roughly 10% in just the first quarter after rising recession fears hurt an asset class more sensitive to economic cycles. Many investors had been excited about the group heading into the year, expecting President Donald Trump's pro-business policies would be especially beneficial to smaller companies, before tariff uncertainty knocked that outlook. However, small caps are starting to look attractive as more of the market moves on from trade headlines, and investors look forward instead to more constructive forces such as interest rate cuts. The Russell 2000 remains in a correction, more than 13% off its recent peak. If the index can clear resistance at its 200-day moving average, breadth, which has remained poor, has plenty of room to expand. "Have universally unloved Small Caps become 'So Bad, They're Good'?" Julian Emanuel, senior managing director leading the equity, derivatives and quantitative strategy team at Evercore ISI, asked in a Sunday note. "Tactically, cratered sentiment intersects with favorable June seasonality." The strategist, who recommended buying the iShares Russell 2000 ETF (IWM) , noted the seasonal and historical trends are in favor of the asset group. In the five other comparable instances when small caps suffered similar declines through the January to May period, they came roaring back in June, he said. The S & P 500 could benefit from a rally in small caps as well. An improvement in breadth in the Russell 2000 that's suggestive of a risk-on market could mean the recent gains in the larger-cap index are similarly sustainable. Ari Wald, head of technical analysis at Oppenheimer, wrote Saturday that he would like to see more than 60% of Russell 3000 stocks to trade above their 200-day average, up from their current 38%. He wrote: "The Russell 2000 would be a likely catalyst for broader market activity, and a Russell breakout above 2,180 (200-day average) should help ignite this untapped firepower." The Russell 2000 was last around 2,140. Elsewhere, Piper Sandler's Craig W. Johnson pointed out that the Russell 2000, which has gone three straight years without making a new high, has never gone four years without one. He said: "We believe small caps are overdue and have room to run back toward their prior highs."