Market action on Friday saw a risk-off theme spread across the equity landscape as treasury yields advanced and the indices pulled back. The SPY lost (-1.34%) while the sharper pullback was seen in the more growth-oriented names QQQ (-1.95%) and small cap IWM (-2.15%).

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Markets took a pause this week from their uptrend, resulting in losses. The sell-off was orderly compared to the magnitude of the sustained rebound from the June lows.

IWM has lagged behind the SPY since December but crossed its 200-day moving average last week as inflation fears and macroeconomic concerns faded. Before the market could barely digest the improved technical outlook, it crossed back below its 200-day moving average.

Looking at Mish's Modern Family is a great way to view how economic variables tie together, distill overall market sentiment, and evaluate the strength or weakness of Modern Family members (sectors).

Here’s a detailed look at one member of the Modern Family, the Granddaddy Russell 2000 (IWM).

IWM represents small-cap stocks, so it's an excellent way to gauge many small companies that manufacture goods or distribute services within America today - Granddad keeps watch over them all.

Grandpa Russell is normally a leading indicator of how much follow-through will be seen by the other three major indices (SPY, QQQ, and DIA).

Recently, the IWM has been prone to false breakouts, moving higher with improved technicals then much lower. It seems this false breakout pattern is potentially repeating.

Grandpa Russell broke above the 200-day moving average earlier this week, but there was too much overhead price resistance, and looks to be a false breakout.

IWM is down (-13.61%) year to date, so small cap stocks are lagging the SPY (-11.63%) and DIA (-7.83%) and only leading the QQQ which is down (-19.62%).

We are in a difficult macro environment - rising interest rates, geopolitical concerns, inflation, and the prospects of a global recession are headwinds converging. In this environment, small cap companies are prone to the most volatility.

There is a debate about whether Grandpa is in a new bull market or simply enjoying a bear market bounce. Let’s look at the technical Fibonacci retracement levels closer.

The retracement touched the 50% Fib level and rebounded to almost the 23.60% Fibonacci retracement which is a standard retracement.

It remains to be seen whether the rally in small caps is sustainable. If and when selling pressure continues, the Russell may lead to the downside.

The overhead resistance points to most likely some period of consolidation now after weeks of higher highs. IWM could also break out to the upside if macro conditions are perceived to be more normalized, and inflation peaked.

Is there an opportunity in small caps? Mish would tell you absolutely!

The key is picking the right fish!

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