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The Russell 2000 is a bell weather index of the US economy, and the best gauge of the market’s reflection on Trump’s policy. This index contains the smaller-listed companies that may not have overseas tax shelters or Cayman Island PO boxes. Some of the companies included are Bottomline Technologies (EPAY: an electronic payment services company), Hovnanian Enterprises (HOV: a home builder operating in 18 states in the US), and Nuvasive (NUVA: a medical device development company).
This index represents the grass roots industry of the US economy that will receive the most benefit from tax reform and the type of border protectionist government policy that President Trump is advocating.
Within the Russell 2000, there was an immediate reaction to the Presidential result in November up until the Federal Open Market Committee’s (FOMC) decision to raise rates on 12 December 2016. Since that date, the index has not closed at a higher high, which would immediately infer that interest rates matter even if they are at the lowest level in human history. Borrowing cheap money can look very expensive if the interest component of that loan moves 4% overnight.
So while the world is consumed with the DOW at 20,000, the real world of business is evaluating the road ahead in an economy that now has a real inflation rate. The FOMC would be busy punching the numbers to make sure interest rates now commensurate with Trump’s economy.
As always, the truth is in the charts. The top right weekly view shows the seven weeks of sideways movement with a 50-point range following the initial rally from early November; this is a bullish flag pattern that has well over a 70% outcome to a top side breakout.
The top left chart is the daily and clearly shows the support level at 1340. Going forward, this will the key level to watch and the point of give up by the buyers, a close below this level would signal a breakdown and potential retest of the 1267 breakout level mid-November 2016.