Small-cap stocks have been on fire, with the iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) continuously grinding out new highs last week and on Monday.
While the markets have been strong — ranging from the S&P 500 and the Dow Jones Industrial Average to the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ) — there’s still a “one foot out the door” mentality. Investors are cautiously optimistic, but willing to exit on any sign that bears still have some control. That mentality isn’t surprising when considering what the first four and a half months of 2018 have been like.
But seeing small-cap stocks continuously hitting new highs certainly doesn’t elicit many fears. It also isn’t something one would expect if the economy were going down the drain or if we were heading for a recession.
With that in mind, let’s talk about a few catalysts.
Why Own Small-Cap Stocks
A higher U.S. dollar may punish large-cap multinational companies, but it doesn’t inflict much damage to small caps. In fact, a strong dollar is actually beneficial to many small-cap stocks. At a time where the dollar is trending higher, not lower, that’s surely a catalyst for the growth in small caps.
So is the U.S. economy. Despite what some fearmongers might claim, the U.S. economy is doing quite well and the likelihood of a recession in the next 12 months is quite low. While the bull market has been running for a while, keep in mind that the U.S. is a giant coiled spring.
After the tech bust in the early 2000s and the financial crisis in 2007-08, Americans have been waiting to hit an economic stretch just like this. Interest rates and gas prices are rising and that won’t help a lot of people or companies, but they’re signs of an improving economy.
Finally, an improving trade-war situation is good for everyone. There’s no need to toss the global economy into the gutter over some ego-battles between the U.S. and China. We may have the larger economy, but that won’t last forever. China is booming — both financially and in population. Working together is a win for all parties, small caps included.
Picking Small Caps
There’s a number of small cap stocks that are doing well and/or worth looking into right now.
Guess?, Inc. (NYSE:GES) has been doing well, with shares powering to new 52-week highs, and Abercrombie & Fitch Co. (NYSE:ANF) isn’t doing bad either, churning out healthy gains. While GES and ANF are doing well in retail, Tanger Factory Outlet Centers Inc. (NYSE:SKT) has been struggling despite being a respectable REIT, (although not my favorite REIT pick like these three).
Hawaiian Holdings, Inc. (NASDAQ:HA) has slower growth coming in 2019, but its 2018 prospects look bright and its valuation is low. Brinker International, Inc. (NYSE:EAT) hasn’t been doing bad either, with a very gradual grind higher.
Of course, all of these names need further assessment for one’s portfolio, but it’s a solid start for those that don’t want to buy into small caps blindly. However, for those looking to buy small-cap stocks as part of a fund or ETF, there’s an option for that too.
Trading the IWM
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The IWM is in a very solid uptrend right now and its burst through $160 resistance is quite impressive. The ETF may start to tire in the short term though. I’d look for a pullback to the $160 level. Should it fail to hold, there’s plenty of support in the mid-$150s, with trend-line support just below.
Finally, the 200-day moving average near $150 has been strong support over the past few years. That too should prop up the IWM should it tumble that far. At this point though, a hold of the $158 to $160 area would be most encouraging for bulls, particularly if the IWM is able to close above $160.
If that’s the case, I’d take it as a bullish nod, for small-cap stocks and the market as a whole. One interesting note comes from a technician I follow on Twitter. He pointed out that the last time the SPY was 5% or more off its highs while small caps were making new highs was January 2013 — not exactly a bad time to be long stocks.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
