SMID indexes touched all-time high last week and the SMID movement since early February has reflected some broadening, note Citi analysts in their recent research report.

Scott T Chronert and Louis L Odette of Citi Research in their recent research note titled “SMID Cap Rap” point out the connection between credit spreads and shorter term Russell 2000 (INDEXRUSSELL:RUT) action for much of the current RUT rally since early February.

Russell 2000: New highs through rotation

The Citi analysts point out that the Russell 2000 (INDEXRUSSELL:RUT) was up 1.4% for the week, modestly outpacing the 1.2% growth witnessed in the S&P 500 (INDEXSP:.INX) and 0.8% growth clocked by Russell Mid Cap.

The Citi analysts point out that the SMID indexes extended their move since early February, posting roughly 10% gains from that point. They note the gain since early February has reflected some broadening.

Citing specific instances, the analysts point out within the Russell 2000 (INDEXRUSSELL:RUT), Energy has been the top performing sector from early February with 300 bps of outperformance, roughly offset by Utilities’ 400 bps of underperformance. However, Health Care, which led the index move early in the run, has underperformed since late February

However, the analysts point out that the SMID move since early February has reflected some broadening and the analysts believe such a trend is a healthy attribute of the current set up.

Despite the SMID indexes touching new highs, the analysts point out the near term overbought conditions indicate SMID investors should anticipate a consolidation phase in timing new purchases.

Cues from RSI charts

The Citi analysts observed that Relative Strength Index (RSI) charts offer a pretty consistent shorter term timing tool. Alluding to the following graph, the analysts note a reading of 70 or more is generally considered ‘overbought’.

Russell 2000 RSI SMID indexes

Moreover, the analysts note their 1-month moving average indicator of the Russell 2000 advance/ decline line has tended to peak near the 400 level over the past several years. The following graph evidences this aspect:

Russell 2000 Vs Advance-Decline Moving Average SMID indexes

The analysts point out that rarely has the index moved materially higher until recent gains had been digested.

The analysts also note the connection between credit spreads and shorter term Russell 2000 action for much of the current Russell 2000 (INDEXRUSSELL:RUT) rally since early February. However, considering Citi’s expectations for a rebound in Q2 economic activity, the analysts would like to keep an eye on this spread as it could support their nearer term call for some consolidation following RUT posting 10% gain since early February.