Beat the Market With the Russell 2000 (IWM)

Wednesday was an ugly day for stocks, as a real risk-off day smashed many parts of the market. We can blame the damage on quarter-end selling, which in turn led to margin calls and forced selling … but the fact is that U.S. equities remain in a choppy environment.

beat the bell stock investing adviceAs such, the path of maximum frustration for stock investors in 2015 remains intact. However, the bigger picture — looking out a few weeks to a couple of months — actually looks promising for stocks.

As I routinely point out in this column, when stocks come under pressure correlation rises. Looking at the below chart of the S&P 500 sector ETFs, it doesn’t take a genius to see that with Wednesday’s pounding, correlation among indices also went up; all sectors except for energy traded completely in sync.

correlation spike
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Year-to-date, the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) is higher by about 2.6% while the S&P 500 is up around 0.6%, and a good part of this outperformance is likely due to the rising dollar. And, the rise and recent dip in the U.S. dollar remains one of the big focal points of this year.

From a macro perspective, then, to get the directional movement in stocks right, it is important to get the direction of the dollar right.

The interest-rate differential between the U.S. and Europe has widened in 2015 as a result of the at least marginally different postures of their respective monetary policy. This in turn has led to a big rally in the dollar versus the euro. Personally, I see this monetary policy divide between Europe and the U.S. persisting, which is why I see the dollar continuing to rise at least for the coming months.

This then filters into equities, as the U.S. dollar will weigh more on the S&P 500 — due to larger exposure to international sales for those multinationals — than the Russell 2000 and IWM, whose composite companies generate 80% of their sales within the United States.IWM ETF Charts

The technical picture for the Russell 2000 also remains bullishly tilted in the longer-term, as the big consolidation period from 2014 came in the form of an inverse head-and-shoulders pattern that released higher so far this year. However, the breakout still has to come on better momentum, which is why we continue to see quick retracements and why the going has essentially been very choppy so far in 2015.

On the below multiyear weekly chart, note that the Relative Strength Index still needs to make a higher high. Also note the rise in the choppiness index.

IWM etf charts weekly
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On the daily chart, see that the low-momentum rise in the IWM ETF since late December has led to three quick moves lower. The first selloff in early January measured nearly 6%, the second one in early March measured about 3% and the latest one so far is 3% deep.

Keeping the bigger picture above in mind, this latest dip should once again provide a buying opportunity in coming days/weeks.

iwm etf charts weekly
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In the immediate term, given Wednesday’s big-breadth selloff, the IWW ETF likely needs more time to consolidate lower. And if push comes to shove, it might have to dip into the $119-$120 area, which is roughly where the rising 100-day simple moving average (blue line) currently comes in.

This is no immediate call to action, but on a further dip — and particularly on a strong bullish reversal day — the IWM ETF could finally get ready for a better momentum push higher that could see it push toward the $130 area.

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Download Serge’s trading plan in the Essence of Swing Trading e-book here. As of this writing, he did not hold a position in any of the aforementioned securities.

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