Russell Must Rally

Charles Payne
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Posted: Aug 23, 2017 12:01 AM
Russell Must Rally

There are a few earnings reports remaining for the second quarter, and they have been remarkable so far. Despite top and bottom line results that largely beat the Street, the market has struggled. Some of this is the old “buy the hype, sell the news” phenomenon, but some pressure has come from the cloud of anxiety emanating from Washington, D.C.

(2Q17) Earnings by the Numbers via FactSet:

  • 95% Report
  • 75% Beat on earnings
  • 64% Beat on sales
  • 10.5% Blended earnings results
  • 8.0% Blended earnings results without energy (+331%)

Another interesting tidbit from this earnings season: one out of five companies mentioned Amazon (AMZN) during their conference call with analysts.  Amazon has become more aggressive this year about expanding into new areas, and now it seems as if no industry is safe; even the local lemonade stands should be concerned.

Through it all, Amazon soared on the release of its earnings results and has seen its shares pull back. A part of this weakness should come from tweets from President Trump about the tax status for Amazon, which leaves many to believe there could be action on the federal level to the tax field/advantage. This isn’t the issue; it was a few years back, but small businesses are still smarting from Amazon’s breadth and advantages. 

The fact is that even the biggest businesses in the nation are smarting from Amazon’s breadth and advantages. Setting politics aside, I continue to see the Amazon juggernaut as being an unstoppable force that might even be able to withstand scrutiny from the most powerful office in the world.

On that note, it will be Amazon’s insatiable thirst to dominate everything that moves, including lemonade stands.

Domestic Hopes Fading?

The election of Donald Trump sparked the stock market to a run that added trillions of dollars in value in a matter of weeks. No index seemed more ebullient than the Russell 2000 so-called small-cap index.  The election of the businessman outside was a victory for Middle America and Main Street. The notion that the Russell 2000 average market cap is $2.3 billion with a median of $809 million would be a proxy has been misleading.

On another note, there are more domestically driven names that would benefit from lower taxes and regulations and smarter trade deals. In that sense, we do root for the Russell 2000 as we root for the revealing of the heartland.

On November 8th,  the Russell 2000 closed at 1,195 but had a head of steam coming off a major dip (markets knew more than the polls and experts).  On November 25th, the index closed at the high of the session; 1,347. 

Down more than 6% from its recent all-time high, the Russell 2000 is closing in on that magical number of 1,347 but as a critical, must hold, a test of support.

Keep in mind this index has been mercurial in the past nine years. It’s either been up double digits (on price basis more on the total return), or more of a negative.  The lone exception was the fractional gain in 2011.  This suggests putting in a stand here that could set up a strong second half of the year that rallies the index significantly higher.

Now, the Russell 2000 has entered negative territory for 2017.  This should be a clear message to Republicans in Washington, D.C. to get their act together and pass stuff that moves the economic needle – and I’m not talking about raising the debt ceiling.

Russell 2000
Price
Total
2008
−34.80%
–33.79%
2009
25.22%
27.17%
2010
25.31%
26.85%
2011
−5.45%
–4.18%
2012
14.63%
16.35%
2013
37.00%
38.82%
2014
3.53%
4.89%
2015
−5.71%
–4.41%
2016
19.48%
21.31%