Market Extra: A ‘golden cross’ is forming in a key stock-market index of small-caps

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Things are starting to turn around in a big way for small-capitalization U.S. stocks, as their larger-cap brethren enjoy a string of recent record closes.

The Russell 2000 index RUT, +0.13%, the benchmark of small stocks, is set to see a bullish “golden cross” price pattern crystallize on the charts, as early as Monday, and that could presage a firmer breakout for the equity gauge, which has badly lagged behind the Dow Jones Industrial Average DJIA, -0.18%, the S&P 500 index SPX, +0.01%  and the Nasdaq Composite Index COMP, +0.19%.

Many market technicians believe that when the 50-day moving average crosses above the longer-term 200-day moving average, this relatively rare golden cross marks the point where a shorter-term rebound morphs into a longer-term uptrend.

In this case, the Russell 2000’s 50-day moving average at 1,539.72 is poised to rise above its 200-day MA at 1,541.24, FactSet data show (see chart attached).

The bullish pattern for the small-cap index — composed of 2,017 stocks with a median market value of $817.5 million, according to its sponsor FTSE Russell — would come only just a little over a month after the popular small-cap benchmark saw a bearish death cross emerge, where the 50-day slides below the 200-day moving average.

The Russell 2000 has enjoyed a recent up trend along with its larger peers but is 8.3% off its Sept. 3, 2018 all-time high at 1,740.75, whereas all three major benchmarks, the Dow, the S&P 500 and the Nasdaq have this week exceeded all-time records last established this summer.

Small companies are sometimes more vulnerable than their larger-cap peers because they are viewed as having less ability to bargain with suppliers and increase their profit margins. They also tend to be less diversified geographically or in terms of their revenue and sometimes are heavily leveraged relative to their earnings.

As a result price moves for small-caps have come in fits and starts in recent months amid worries about a domestic economic recession, and concerns about trade tensions between the U.S. and China, which could deliver a wallop to the biggest, multinational companies as well as weakening global economic expansion.

Recently, however, investors have been wading into battered assets, as some concerns about a near-term recession hitting the U.S. market have subsided and as trade tensions are easing, even if they aren’t entirely resolved soon.

That dynamic might translate to a small victory for shares of some of the tiniest publicly traded companies.