The US2000 is underperforming the SPX500. This is worrisome.
US2000/SPX500 Relative Strength
Source: www.tradingview.com
A relative strength chart (rs) compares two instruments to each other as a ratio chart. The above shows the rs between FXCM's US2000 and SPX500 CFDs for the year-to-date, with the US2000 showing clear underperformance.
The US2000 tracks the performance of 2,000 small-cap US stocks. It is generally a more volatile index, as smaller companies have more limited access to financial resources than big companies. Many view the US2000 as a barometer of the US economy, due to its sensitivity to macroeconomics. Thus, its underperformance is worrisome.
US2000/SPX500 Weekly Analysis
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From October last year through to February of this year, both the US2000 and the SPX500 charted a higher trough followed by a higher peak. This put both indexes into uptrend. However, both were sold down in March 2023 (blue arrows) following the stress that emerged in the US banking sector.
In March, three small- to mid-sized banks – Silvergate Bank, Signature Bank and Silicon Valley Bank – failed. This triggered a sharp drop in global bank share prices, with regulators responding to prevent contagion. Since then, the SPX500 has shown recovery but the US2000 has not.
US2000 and Banks
Source: www.tradingview.com
It is not a surprise that the US2000 is lagging the SPX500. The banking sector has a significant weighting of 16% in the US2000.
Here, we compare the US2000 (top chart) with FXCM's US.BANKS basket (middle candlestick chart). The bottom indicator shows the correlation coefficient (cc) between the two. The cc shows a robust reading of 86%. This indicates that the two instruments have a very strong positive relationship, moving similarly to one another.
Conclusion
As the US2000 has shown a lack in recovery since March, so has the US.BANKS basket and vice versa. The US2000 is strongly influenced by the banking sector, which makes up a large part of its weighting. As such, until the banking sector starts to show signs of recovery, it is likely that the US2000 will continue to underperform.
Russell Shor
Senior Market Specialist
Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.
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