Stock Market Comment: Russell 2000 sends warning signals

• Russell 2000 (US2000) fails to break above key resistance zone

• Major workers strike at General Motors (GM.US)

• Trade war and break-up with Amazon weighs on FedEx (FDX.US) 

US small-cap index once again pulls back from key resistance zone

Russell 2000 (US2000), the US small-cap index, has been lagging its other Wall Street peers significantly this year. Both, S&P 500 (US500) and Dow Jones (US30), are trading near their all-time highs while Russell 2000 sits around 10% below historic peak. 

Declining US industrial output in 2015 and 2016 (shaded box on the left) was accompanied by earnings recession of Russell 2000 index. US small-caps experienced annual decline in earnings in Q4 2018, Q1 2019 and Q2 2019 as well. Source: Bloomberg, XTB Research

US small-cap stocks are often overlooked by investors, who tend to focus on S&P 500, Nasdaq or Dow Jones shares. However, small-caps have a feature that makes them a group worth watching - their revenue is focused primarily on the United States. While S&P 500 companies generate around half of their revenue abroad, stocks from the Russell 2000 index generate around 80% of sales from the domestic economy. Having said that, weakness of the small-cap segment may hint at weakening US economy, especially as industrial, financial and consumer discretionary stocks make up over 40% of the index weight. In fact, Russell 2000 companies experienced annual decline in earnings on the index level in Q4 2018, Q1 2019 and Q2 2019. The previous such a long streak lasted from Q3 2015 to Q3 2016 (5 quarters) and during that time the US industrial production declined just as it did in the first six months of 2019.

Russell 2000 (US2000) is lagging S&P 500 (US500, blue overlay) significantly this year. Small-cap index once again reversed after failing to break above the resistance ranging 1585-1595 pts. A pullback towards the lower limit of the range (1470 pts) may be on the cards now. However, support level at 1520 pts, marked with local peaks and lows as well as 200-session moving average, may turn out to be a hurdle for the bears. Source: xStation5

General Motors workers strike a risk to the US economy?

General Motors (GM.US) attracts increased attention this week as the US carmaker’s operations are being harmed by workers strike. Over 49 thousands employees walked off the assembly lines expressing dissatisfaction over lack of progress in talks with GM management. Over 30 manufacturing plants and more than 20 distribution warehouse were shut in the aftermath of strike launch. It is estimated that the US carmaker may be losing anywhere from 50 to 100 million USD each day the strike is ongoing. The company has to decide now whether to bow to worker union’s demands on wages and benefits or risk prolonged disruption to operations. A point to note is that around 10 thousand US companies supply GM with parts and services therefore a prolonged halt to operations could see the damage spread and, in turn, be a noticeable hit to the US economy.

General Motors (GM.US) share price dropped around 5% on Monday after breakdown in negotiations between the company's management and workers union triggered a strike. Talks were restarted and stock managed to recover. However, unless the strike ends, any bigger upward price move looks questionable given how much the company is losing on halted operations. Source: xStation5

FedEx slumps as trade war and break-up with Amazon weigh on outlook

FedEx (FDX.US), the US logistics firm, released earnings report for the quarter ending 31 August on Tuesday after session close. The company generated smaller-than-expected profit and revenue, and decided to lower full-year outlook. Unsurprisingly, the company blamed ongoing trade war and Chinese economic slowdown as reasons behind the underperformance. However, the company said that the departure of a “major customer” played its toll as well. While the customer was not named, it is almost certain that FedEx meant Amazon (AMZN.US). The two companies parted ways earlier this year as Amazon started to utilize its own shipping network. This shows that the logistics sector is being hit by a double-whammy - deteriorating trade environment and growing competition. Amazon was one of FedEx's largest customers and accounted for over 1% of total revenue in 2018.

FedEx (FDX.US) shares were trading in a downward move since Sino-US trade tensions began to flare up in the first half of 2018. Lacklustre earnings report caused the stock to open over 10% lower on Wednesday. Note that the stock plummeted from interesting technical area - combination of 200-session moving average, downward sloping trendline and level of the previous peak ($176). Following a slump, price found itself within the support zone ranging above $150 handle and a break below would paint a fresh 3-year low. Source: xStation5