Lately I’ve been very impressed with the continued strength in small-cap stocks. Small-cap stocks as tracked by the Russell 2000 have rallied 4.8% over the past month. That’s compared to the 1.9% increase for the S&P 500 and the 0.1% gain for the Dow Jones.
A chart showing the change in price for the Russell 2000, S&P 500 and Dow Jones from May to June 2021.
Source: Chart by InvestorPlace
Considering all of the seasonal forces currently at work, these gains in the Russell 2000 could actually be a drop in the bucket. I’m anticipating that June is going to be an exceptional month for the stock market, especially for small-cap stocks.
The reality is that the 33rd annual Russell Reconstitution will occur this month. You may know that the Russell indices are rebalanced every June. The underperforming stocks are removed, and new stocks that are more representative of the current market environment are added.
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The preliminary add/delete lists were unveiled June 3. Then, the updated add/delete lists were released on June 11 and June 18. The add/delete lists were finalized on Monday, June 14, and the new rebalanced Russell indices will begin trading on Monday, June 28. In other words, the new lists will take affect after the market closes today.
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In general, this year’s Russell 2000 rebalancing has added more names in the technology, consumer discretionary and health care sectors.
Why Is the Russell 2000 Rebalancing Important?
This is important for one simple reason: The realignment of the Russell 2000 creates forced buying pressure under small-cap stocks in the days following the preliminary add/delete lists. Stocks have been known to move anywhere from 10% to 20% due to the Russell Reconstitution alone, as institutional investors who follow the indices try to sync up their portfolios.
So, I’m anticipating that the Russell realignment could trigger an institutional stampede into the new stocks that are added to the Russell 2000 indices.
Excited? I certainly am, especially when you consider that the Russell realignment isn’t the only force set to propel a selective group of stocks higher this month.
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