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A Big Rally Descends on Small-Cap Stocks (IWM)

Yesterday's mega-breakout is signaling higher prices for IWM


Small-cap stocks joined the market rally in a big way Wednesday, and it should be chalked up as a big win for the bulls.

One of the complaints surrounding the October stock surge was the lack of breadth. The charge was led by large caps — especially big tech names — and had much less participation from mid-cap and small-cap stocks.

Well, the bulls effectively took that complaint behind the barn and shot it. With the breakout in the Russell 2000 Small Cap Index, the little guys are officially in the game.

The iShares Russell 2000 ETF (IWM) gushed 2.92% higher, almost tripling the gain in the large-cap-laden S&P 500.

The persistent weakness in small-cap stocks, and Wednesday’s sudden awakening, is easily seen in the accompanying chart showing IWM (candlesticks) with an S&P 500 overlay (gray area chart).


Like fast friends, both indices tend to move together. Take note, however, of the sharp divergence taking place in recent weeks as the rally in the S&P 500 (black arrow) far outdistanced IWM.

If Wednesday’s breakout is any indication, perhaps we’re in for some catch-up in small-cap stocks over the coming weeks. The mega volume accompanying the breakout shouldn’t be discounted either. Accumulation has descended on IWM in a big way.

Here’s a bullish play with a big payday should the good times in small-caps keep rolling.

An IWM Call Spread With BIG Potential

Buy the Jan $117/$122 call spread for $2.30 or better. Your risk is limited to the initial $2.30 debit and will be lost if IWM sits below $117 at expiration.

The max reward is limited to the distance between strikes minus the initial debit, or $2.70, and will be captured if IWM can rise above $122 in the next three months. By risking $2.30 to make $2.70, the spread offers a tidy 117% potential return if the IWM ETF rises a mere 5% from here. Now that’s leverage.

As of this writing, Tyler Craig owned bullish option positions in the Russell 2000 Index.

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