Massive Breakout: This ETF Signals Big Gains for Small-Cap Stocks

Key Points

• The iShares Russell 2000 ETF (NYSE: IWM) broke above multi-year resistance last week, driven by lower-than-expected June inflation data, leading to a weekly gain of 6.11%.
• Cooling inflation fueled speculation of interest rate cuts, benefiting interest rate-sensitive small and mid-cap stocks.
• Several IWM holdings, such as ENVX (+13%), AUR (+26%), LNTH (+56%), RUN (+40%), and JOBY(+28%), experienced significant weekly gains, highlighting the potential for continued strength in the small-cap sector.

The iShares Russell 2000 ETF NYSE: IWM experienced a significant breakout above multi-year resistance last week, sparked by the release of the CPI inflation data on Thursday. This move was one of the most eye-opening events of the week, drawing significant attention to small-cap stocks.

IWM's Impressive Rally

The iShares Russell 2000 ETF posted an impressive weekly gain of 6.11%, driven by lower-than-expected June inflation data. The CPI declined by 0.1% from May, putting the 12-month rate at 3%, around its lowest level in over three years, the Labor Department reported Thursday. This fueled speculation of potential interest rate cuts. This performance underscores a significant market shift, with interest rate-sensitive small and mid-cap stocks benefiting as investors redirect inflows away from mega-tech names into the broader market.

Impact of Cooling Inflation on iShares Russell 2000 ETF

The iShares Russell 2000 ETF seeks to match the price and yield performance of the Russell 2000 Index, which measures the performance of the smallest 2,000 issuers in the Russell 3000 Index. These small-cap stocks represent the smaller segment of the U.S. equity market.

The recent surge in the Russell 2000 was driven by the latest inflation report from the Labor Department, showing an unexpected decline in consumer prices in June. This cooling inflation has increased market expectations of a Federal Reserve rate cut in September. Lower borrowing costs are particularly beneficial for small-cap companies, which often have higher floating debt levels than larger firms. There is an increased urgency to raise capital to fuel growth and, in some cases, cover operational expenses when they are pre-revenue. 

Small Caps Breakout and Leading IWM Performers

The IWM broke above its major $210 resistance zone, which has held firm since 2022. The ETF closed the week with a 6.11% gain at $213.14, confirming the breakout and signaling a significant sentiment and trend shift. If the IWM continues to consolidate above prior resistance, turning it into support, a more stable and higher timeframe trend could emerge, potentially leading to market outperformance for the remainder of the year.

IWM holdings have an aggregate rating of Moderate Buy based on 398 analyst ratings covering 48 companies (12.5% of the portfolio). The aggregate price target for these holdings is $218.95, ranging from $169.38 to $262.21, forecasting just 2.7% upside.

Several IWM holdings experienced notable gains last week. Here are just five of the standout movers:

1. Enovix Corporation NASDAQ: ENVX: Closed the week up over 13%, with significant upward momentum in recent months. This small-cap company has a high short interest of nearly 30%.

2. Aurora Innovation NASDAQ: AUR: The stock surged over 26% last week. The $5.74 billion company trades above all major moving averages and has broken its downtrend.

3. Lantheus Holdings NASDAQ: LNTH: LNTH, a healthcare company with an $8.5 billion market capitalization, was one of the top-performing IWM members last week as shares surged over 56%. The significant gain came after the Centers for Medicare and Medicaid Services (CMS) released a proposed rule that would boost the Medicare reimbursement rate for diagnostic radiopharmaceuticals.

4. Sunrun Inc NASDAQ: RUN: This $3.8 billion company was one of the top performers of the IWM, soaring over 40% last week and breaking above its downtrend resistance. The stock saw a significant increase in trading volume on Thursday and Friday, adding to its momentum and breakout.

5. Joby Aviation NYSE: JOBY: This industrial company with a $4.6 billion market capitalization surged almost 28% last week. The positive momentum and surge came after the electric vertical takeoff and landing (eVTOL) company reported a new milestone for its aircraft, completing a massive 523-mile-long eVTOL flight.

The breakout in the IWM and the strong performance of its holdings highlight the potential for continued gains in the small-cap sector, especially as inflation cools and the Federal Reserve considers rate cuts. Investors should watch for continued strength and consolidation above key resistance levels in the coming weeks.