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This stock index is in rally mode and it could mean big things for investors in 2020

Brian Sozzi
Editor-at-Large

Judging by the recent move in the small-cap Russell 2000 Index (^RUT), the “phase one” trade deal with the U.S. and China is in the books and the U.S. economy could be poised to re-accelerate as a result in early 2020.

After staying in a tight trading range for most of the year — while the Dow Jones Industrial Average, Nasdaq Composite and S&P 500 have surged — the Russell 2000 has broken out to a one-year high this week. The index comprises smaller market cap companies with operations primarily in the U.S.

For a good part of 2019, the index has been under wraps amid concerns about how small companies with less scale would navigate the Trump administration’s trade war.

The long-awaited breakout sends a signal to traders that U.S. companies are faring better than expected during the rocky trade conditions. Should a “phase one” trade deal be solidified before year end, that would only support the resilience in U.S. companies — at least seen through the prism of the Russell 2000.

Historically, a breakout of the Russell 2000 to a one year-high is often very bullish for the index.

A trader works on the floor of the New York Stock Exchange. (UNITED STATES - Tags: BUSINESS)

From 1979 to 2019, the Russell 2000 has gained one month, three months, six months and one year following a breakout to a one-year high, according to researchers at SunDial Capital Research. The median one-year gain on the Russell 2000 after the breakout has been a cool 16.4%.

What’s the more, the Russell 2000 breakout to a one-year high historically means good things for the broader S&P 500. SunDial Capital Research notes the S&P 500’s median return one-year after a Russell 2000 breakout to a one-year high has tallied 13.7%.

Of course all of this could be smoke in mirrors if higher tariffs go into effect on Dec. 15. In the meantime, three cheers to hoping the rally is sustained.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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