It is often said that if you don’t have anything good to say, then it is best not to say anything at all. For that very reason, I have not devoted a lot of coverage to small cap stocks. Well, today that changes as the latest market diagnosis for the Russell-2000 merits the attention of investors.
What really caught my eye in today’s trading was the long-awaited and overdue breakout of the Russell-2000 exchange traded fund (IWM). Although it had broken through the resistance of its downtrend, the new uptrend it initiated in early October-2015 quickly began to stall within a congestion zone as it consolidated its gains. This provides the widely followed small-cap index with a new level of support as it has now broken out to a new 30-day high.
Furthermore, 70% of the index’s components have a short interest ratio of 5 or more, which means that it would take a least a week’s period of trading to cover. However, it’s actually worse than that if you’re still short the index or some of its components because at least 34% of them show an short interest ratio of 10 days or more to cover. I think you are beginning to get the point and if this is not enough to scare you, then you might want to heed the acceleration of momentum within the Russell-2000 as the percentage of its components trading above their 50-day moving average has jumped from neutral (@ 57%) to bullish (@ 67%) territory.
Fundamentally speaking, if the Fed raises interest rates, it will only do so based upon economic data that confirms the domestic and global economies are strong enough to handle such. This would inevitably create a stronger U.S. Dollar, which need not be interpreted as adversarial since smaller companies tend not to be as dependent upon exports like their large-cap and multi-national brethren.
In summary, the IWM has been beaten up badly during the August and September selling and has corrected more than 17% from its June-2015 high to its September-2015 low. The group has plenty of catching up to do in terms of relative performance and if you’re not long then you just might be wrong because all looks good under the hood.