Wednesday’s stock rally deserved one title and one title only: revenge of the small-caps. Though equities lifted across the board, it was by and large a small-cap affair. The Russell 2000 held the torch and seemingly lit the shorts on fire. Look no further than the chart of the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) for evidence. IWM just broke out of a 10-month-long base.
While the little guys have been stuck in neutral mode for months on end, large-caps have been notching record high after record high. The relative weakness plagued IWM for virtually all of 2017.
And then this month, small-caps flipped a switch, shedding their weak ways for a leadership role.
To chronicle the tune change, check out the Comparative Relative Strength (CRS) indicator displayed in the lower panel of the accompanying chart. You can think of this metric as a ratio chart of IWM to the S&P 500. When small-caps are outperforming, the line rises. And when they are underperforming, the line falls.
Click to Enlarge
Note the trendline break that occurred earlier this month, confirming IWM’s return to outperformance. Another indicator demanding mention is volume. High volume days suggest institutional money flow is afoot. And yesterday we saw the largest volume day since last November’s election.
This wasn’t some retail driven rally. It was an institutional led rotation into small-caps. The only thing that ended the buying binge was the closing bell.
Though IWM is stretched in the short run, any and all dips should be viewed as a gift to be gobbled up.
Big Profits in IWM Call Spreads
As is usually the case for an index at record highs, implied volatility for IWM options is in the dumps. And that is increasing the appeal of long calls and call spreads. Let’s build a position with the potential to double our money if small-caps rise a bit further over the coming months.
Buy the Nov $147/$152 bull call spread for $2.30. The initial cost represents the max loss and will be forfeited if IWM sits below $147 at expiration. The max gain is $2.70 and will be captured if small-caps can rise above $152 by expiration.
As of this writing, Tyler Craig didn’t hold any positions in any of the aforementioned securities. Want to learn how to master the art of option selling for high-probability cash flow? Check out Tyler’s recently released video series through Tackle Trading on how to systematically sell iron condors for monthly income.
