The Russell 2000 index has already been in a sharp uptrend over the past three months, but Craig Johnson, the chief market technician at Piper Sandler , believes the small-cap benchmark is on the verge of a breakout that could push it up much further in the months ahead.
In a recent CNBC interview, Johnson said he expects the small-cap benchmark to reach a new all-time high by mid-October, citing a bullish technical setup and improving macro conditions.
“We see about 16% upside,” Johnson said. “The Russell 2000 is very likely to make a new high – and probably will do so before mid-October.”
Russell 2000 has formed a bullish pattern
Johnson’s optimism is rooted in a classic technical formation: the inverted head and shoulders. This pattern, often viewed as a reliable signal of a trend reversal, has been forming on the Russell 2000’s weekly chart over the past two to three years.
According to Johnson, the time it took to build the pattern aligns with the projected timeline for its breakout to play out.
The Russell 2000, which tracks 2,000 small-cap U.S. companies, has lagged behind the S&P 500 and Nasdaq in recent years. But Johnson believes that’s about to change.
“If you’re looking for opportunities that haven’t already been exploited, you’re probably not going to find that in the Magnificent Seven,” he said, referring to the mega-cap tech names. “You’re going to find that down cap.”
FOMO, fed, and fundamentals to drive Russell 2000
Beyond technicals, Johnson pointed to a confluence of macro and behavioral factors supporting small caps.
The Federal Reserve has signaled a potential shift toward rate cuts, inflation pressures are easing, and the U.S. economy has proven more resilient than many expected. These conditions tend to favor smaller companies, which are more sensitive to borrowing costs and domestic growth.
He also flagged the return of the “FOMO trade” – fear of missing out – as a key driver.
“There’s a lot of managers that didn’t get out of the way in the April downturn and didn’t re-engage in May or June,” Johnson said, adding “with market making new highs, the pain trade is squarely up.”
Johnson sees transportation space as an exception
Interestingly, Johnson remains underweight transportation stocks, despite their domestic focus. He cited weak trends and margin pressures in trucking and airlines, exacerbated by rising fuel costs.
Instead, he sees stronger prospects in sectors like industrials, healthcare, financials, and technology – areas with heavier weightings in the Russell 2000.
As the index approaches key resistance levels, traders will be watching closely for a confirmed breakout above the neckline of the inverted head and shoulders pattern. If that happens, Johnson’s forecast of a new high by October could quickly shift from a bold prediction to market reality.
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