Chink In Small-Caps’ Armor

Some early signs of fatigue are showing up on the Russell 2000, which has more than doubled since March. Conditions are extended. A week ago yesterday, the small cap index was 34.7 percent above its 200-day. Although this in and of itself does not mean the prevailing overbought conditions unwind right here and now, this comes at a time when there are hues of speculation in both options and margin debt.

There is a chink in small-caps’ armor. After more than doubling since bottoming at 960s in March, the Russell 2000 (IWM) this week showed early signs of distribution. Monday, the small cap index posted a new all-time high of 2026.24 but only to reverse and close the session down 0.4 percent to 1996.25. This was followed by a 1.8-percent decline on Tuesday and a 1.1-percent rally on Wednesday.

Tuesday’s low of 1950.82 was bought. The 20-day lied at 1933.10 then, and bulls obviously were not ready to lose that average that easy. There is also short-term horizontal support at 1930s (Chart 1). Wednesday, the Russell 2000 (1979.99) closed essentially at the 10-day. Inability to recapture the average will raise the odds that the 20-day will be the next victim, a development that likely shifts momentum to bears’ favor – at least in the short term.

Conditions are extended.

Particularly after bottoming in late October, the index just about went parabolic (arrow). In between, bulls not only reclaimed 1600-plus, which goes back to January 2018, but also 1740s, where it peaked in August that year.

Investors began to gravitate toward small-caps post-November 3 presidential election, and particularly after Pfizer (PFE) and Moderna (MRNA) delivered positive vaccine news – on the 9th and 16th last month, respectively.

The vaccine news has meaningfully raised hopes that the US economy would get back to normal next year. By nature, small-caps are more domestically exposed than their larger-cap cousins, which also have international exposure.

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This blog is not intended to be, nor shall it be construed as, investment advice.  Neither the information nor any opinion expressed here constitutes an offer to buy or sell any security or ...

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