Stocks closed with a bang last week as major technology stocks like Amazon.com, Inc. (NASDAQ:AMZN) ramped higher following their latest blowout earnings reports. While the bulls and bears each have their opinions on this market, with just two months left in 2017, from a tactical perspective (although a near-term volatility spike and thus a pullback in stocks is likely), the focus now should shift to a possible year-end melt-up in stocks.
One of the themes that I so often discuss in this here column is that of group and sector rotation, which once again this year was where alpha was generated for investors and traders and which will likely become an even bigger focus into year-end. In other words, while the broader large-cap equity indices such as the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) could also see further upside into year-end, my focus will be on pockets of absolute and relative strength.
One of the more powerful and unsuspecting rallies since August came by the small-capitalization stocks and the iShares Russell 2000 Index (ETF)(NYSEARCA:IWM). After screamingly overbought readings in early October, the IWM ETF has since consolidated in a constructive manner over the past few weeks … i.e. what we could refer to as a “bull flag pattern.”
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
From a purely technical perspective, a break and hold above $150.50 area could qualify as a breakout and get a next leg higher underway into year-end and toward $155 or possibly higher.
While this chart stuff is nice to know, more important in my eye is to understand what ignited this rally in small-capitalization stocks.
So you know, the IWM ETF is made up of about 20% financial companies, which rallied in September due to the rise in interest rates. As such, if a further rise in interest rates were to manifest into year-end, which I currently expect, then banking stocks should also see a bid, which in turn could manifest with more upside in small capitalization stocks.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
One of the other focal points to yours truly into year-end and for now is the price movement in oil. In last week’s opening missive, I offered that the energy sector of stocks could see more upside into year-end and a good technical breakout if oil as represented by the United States Oil Fund LP (ETF) (NYSEARCA:USO) can break higher on a more sustainable basis.
Although energy stocks last week did not break out just yet, the USO ETF did. Could we see another 5% or more of upside in the USO ETF in the next couple of months based on this? I think so, but any strong bearish reversal could swiftly change this picture again from a technical perspective. See both sides.
In summary, although the broader stock market as measured by the SPY etf remains overbought in the near-term, underneath the surface constructive price action in small caps and the energy complex (among other places) remains and could thus prop up equity markets into year-end.
Check out Serge’s Trade of the Day for Oct. 30.
Today’s Trading Landscape
To see a list of the companies reporting earnings today, click here.
For a list of this week’s economic reports due out, click here.
Tell us what you think about this article! Drop us an email at editor@investorplace.com, chat with us on Twitter at @InvestorPlace or comment on the post on Facebook. Read more about our comments policy here.
Take Serge’s quiz to find out which trading strategy best suits your personality.
