Wednesday, November 14, 2007

Keep a close eye on the Russell 2000

From Investopedia

An index measuring the performance of the 2,000 smallest companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.

Small cap stocks are about growth as opposed to dividends. As such, the small cap index needs a healthy economy; in order for a company that needs to grow the environment the company is operating in much be growing as well. In addition, because these are smaller stocks they are considered riskier. So watching this index can give us an idea of investors risk appetite.

Here is a four year chart of the Russell 2000

Notice the Russell is in the middle of a 4 year rally. However,

Notice on the 3 month chart prices are now below that 4 year trend line. They've dipped down to this level before a few months ago and bounced back. But whenever an index in the middle of a 4 year bull market is near the lower trend line it's important to keep a very close eye on what it's doing.