Russell 2000 Clips All Time High – Can the Small-cap Index roll through 1000 by Year End?

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May historically ushers in six months of disappointing stock returns, but it’s the preceding month of 2013 that put a snag in The Russell 2000 (RTY), which sagged to 898.40 (-0.4%) in April, while the S&P 500 clipped new cycle highs. We’re little more than a week into May and the RTY today hit a record high of 971.41, snubbing the adage “Sell in May” – and analysts at Credit Suisse peg index potential at 1,000 or more this year.

“We continue to see overshoot potential to 1,000 or slightly more, but worry valuation pressures may return if that is achieved. While we remain constructive on small-caps and small- to mid-caps (SMID) for now and would be buyers of any dips, our level of enthusiasm is clearly a notch below where we were at the beginning of the year,” Credit Suisse said earlier this week, according to Barron’s.

The RTY is up 14.5% year-to-date and 24.1% on the year but the Switzerland-based firm points out that only two of the six key small-cap “DRIVERS” (Deals, Revisions, Investor Sentiment, Valuation, Economy, Retail Money Flows) are positive: investor sentiment and retail money flows.

“High-yield spreads have a little more room to tighten, while American Association of Individual Investors (AAII) bulls still have ample room to recover before hitting past peaks; both are normally positive for small-cap returns.

“Retail money flows (both active and exchange-traded funds (ETFs)) continue to be quite strong for small-cap funds, and much better than the trends in place for mid- or large-cap funds. We do have some concerns that the normal seasonal weakness in small-cap money flows could return over the summer, potentially removing a powerful underpinning of recent strength in the small-cap space. But for now money flows remain a positive for small-cap performance.”

Despite positive indicators, some economists are bracing for market jolts at the mercy of broader economic variables.

Ian Shepherdson, chief economist for Pantheon Macroeconomic Advisors, called the forecast for the next six months “cloudy” and “profoundly depressing” as the effect of the repercussions of tax hikes, spending reductions and the sequester, which began March 1, begin to emerge.

So far Wall Street is taking it all in stride, with the major indices trending higher in Friday’s mid-morning session as Fed Reserve Chairman Ben Bernanke details efforts to mitigate risks in the financial markets. Speaking at the Chicago central bank’s annual meeting on bank structure and competition, Bernanke said the Fed is closely watching the balance of potential risks associated with low interest rates.

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