What’s going on with the small-cap Russell 2000 index lately? While the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) is higher by about 2% for the year, it continues to largely shuffle sideways and underperform the S&P 500.
The bears point to this small-cap underperformance potentially being a warning sign, as small caps often tend to act as a leading indicator. The bulls, on the other hand, point to large-cap tech, which has been a significant contributor to the recent rally in the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
To start building some perspective for small-cap stocks, look at the following ratio chart where I divided the IWM ETF by the SPY ETF.
On the chart, we clearly see that out of the election last November and December, small caps widely outperformed large caps. However, in 2017, this outperformance has retraced back to the blue support line.
Through this lens, the recent weakness in the IWM could be labeled merely a mean-reversion move, which if we look closely has in recent days already begun to bounce a little. In other words, I don’t see a major red flag in small-cap stocks … yet.
IWM ETF Charts
Looking at the multiyear weekly chart of the IWM, we see that the up-trending channel marked by the purple-dotted parallels remains intact.
After a sharp rally last November, the IWM ETF reached the upper end of this channel and has been in consolidation mode since. This sideways consolidation phase thus far continues to be supported by buyers quickly stepping in at the lower end of the range, marked by the blue box.
When I last mused about the Russell 2000 on Feb. 16, I offered that the IWM ETF was looking to break out and head toward a first upside price target range around $141-$141.50. A couple of weeks later, the IWM traded as high as $140.90, and over the ensuing week began to retrace lower.
As such, the Russell 2000 remains in a sideways range that now has been firmly in place since early December 2016.
On the daily chart, we see that the IWM is holding a key support line in the sand just around $134.
This line is being well-defended by buyers who each time step in with authority, leaving behind bullish reversal candles.
As long as $134 holds, the IWM ETF remains constructively positioned to potentially push higher into the mid-$140s in ensuing months.
A break and hold below $134 could quickly open downside toward $130 as a next downside price target.
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