Embrace The Fear - Russell 2000 And S&P In 'Strong Buy' Territory

Since my last update markets have taken a bit of a spin. Investors should now take note that both the S&P and Russell 2000 fell into the 'Strong Buy' territory in the move to their respective swing lows. The Russell 2000 fell as far as 20% below its 200-day MA; note, if it reached 21.4% below its 200-day MA it would be in the 1% zone of historic weak action going all the way back to 1987; like it or not, this is a significant investor buying opportunity for Small Cap stocks.

However, the last few days have seen a bounce across the indices but it remains to be seen if this heavily oversold bounce will build into something more. Trading volume has been light in line with seasonal factors, although the Friday before the holidays was a massive distribution day. There is little confidence in the market and the New Year may see struggles if buying volume doesn't pick up.

In the case of the S&P this bounce could start to struggle if it makes it as far as the 20-day MA, particularly if this bounce has been driven by short covering rather than value buying.

The Russell 2000 is the index which is offering the best holiday discount and the bounce is looking like the one most likely to succeed. There may be some weakness next week but near-term traders can look to measure risk on a loss of 1,266 with upside targets of 20-, 50-, and 200-day MAs as starting points. Investors should not overthink their commitment to buying but know they are getting a good price.

The Nasdaq is also offering excellent value even if it's caught a little between indices. Relative performance had flat-lined from November but it may be gaining a little interest as money cycles out of defensive large-cap stocks into more speculative technology and small-cap stocks.

The Semiconductor Index is interesting in that the rally has managed to create a scrappy looking 'bear trap', which - if it holds - would set up for a decent rally in the Nasdaq and Nasdaq 100; 1,135 is key support in this regard.

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Gary Anderson 1 year ago Contributor's comment

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