U.S. Equity indices have kicked off Q3 2025 seeing a laggard rally with small cap index, the Russell 2000 Index (RUT), outpace large cap indices over the short time (6/30 – 7/10).
U.S. Equity indices have kicked off Q3 2025 seeing a laggard rally with small cap index, the Russell 2000 Index (RUT), outpace large cap indices over the short term (6/30 – 7/10). This week’s action brought RUT back to positive on a year-to-date basis by more than 1% since February.
On the default point and figure chart, RUT returned to a buy signal in the latter part of April and given five additional buy signals with the most recent occurring upon the double top break at $2180 on 6/27. This week’s action brought RUT above the 2200 level to 2260 and matching the top of the 10-week trading band. As of 7/10, RUT resides at its most overbought level since late 2023 with a weekly OBOS reading of 92%.
The ETF tracking RUT, the iShares Russell 2000 ETF (IWM), similarly returned to a buy signal in late April and has rallied to an overbought stance. With a fund score of 1.90 highlights the trending improvement of the ETF but also shows the long-term relative strength picture is negative for the broader small cap space relative to large caps. This lends a portfolio to still favor large caps from a long-term perspective and if small cap exposure were to be prevalent, it’d likely be individual stock exposure in high attribute names exhibiting strong long-term technical pictures.
While the long-term RS picture for small caps remain the same, the recent laggard bounce within small caps highlights additional themes within broader US Equities. Examining the performance of the Invesco Small Cap Sector ETF lineup from the beginning of Q3 provides further evidence of the laggard bounce theme within sectors. Materials and Energy have ranked within the bottom half of the NDW DALI Sector Rankings since the beginning of 2024 but have led small cap (and large cap by of the Sector SPDRs) sector space since the beginning of Q3.
As an example of recent laggard action, the chart of the Invesco S&P SmallCap Materials ETF (PSCM) is below. The fund entered 2025 in a negative trend and ultimately fell as much as 25% by early April. After reversing back into a column of Xs in the latter part of April, the fund rallied from the upper $50s to the mid $70s after action on 7/10. While the fund still technically maintains a sell signal on its default chart, PSCM has given four consecutive buy signals on the more sensitive 0.50 point per box chart. This week’s action has placed PSCM at its most overbought level since late 2020 with a weekly OBOS reading of roughly 170%!
From a relative perspective, this recent rally has brought the market RS chart back into a column of Xs after having been in a column of Os since September 2024. While the RS chart shows a near-term trend in favor of the Materials fund, the long-term relative strength relationship favors the broader market.
Given recent action has been driven by short-term fodder – tariffs, geopolitical tensions, etc. – areas of the market like the Materials sector have worked their way into an extended position. A pullback or period of consolidation would seem may seem emanate given the overbought level of similar sectors and the broader market. Following the potential pullback, investors will see if these laggard sectors that have led Q3 in this short time are able to sustain or if recent action was ultimately just short-term.
