While large-cap U.S. stocks as represented by the S&P 500 currently remain at least 5% from their all-time highs set back in January, their smaller-capitalization cousins, i.e. the Russell 2000 as represented by the iShares Russell 2000 ETF (NYSEARCA:IWM) just last week closed at a fresh all-time high. From a trading perspective this looks, sounds and smells promising for higher highs in coming weeks if not months.
When it comes to U.S. stock market analysis, I generally find that traders and investors alike often overlook the importance of a) multi-time-frame analysis and b) pegging one sector or group versus another, i.e. relative strength analysis. All else being equal, relative strength (or relative weakness for that matter) is a leading indicator.
IWM ETF Charts
To wit, the IWM ETF over the past two months of March and April has showed significant relative strength versus large-cap stocks. On the below chart I plotted the Russell 2000 versus the S&P 500, and the relative strength is obvious.
Moving averages legend: red – 200 week, blue – 100 week, yellow – 50 week
Moving on the absolute price charts of the IWM ETF, i.e. the regular price chart, we see that from a multiyear perspective, this group of stocks continues holding on to its simple up-trend line from 2016. In fact its yellow 50-week simple moving average held as support in February and again in April.
All else being equal, this to me looks like a breakout to the upside is not too far away, one that could take this index into the $165-$170 area without too much effort. Again, what’s notable here is that the strength in small-cap stocks is not just absolute but also relative, i.e. small caps are outperforming large cap stocks.
Moving averages legend: red – 200 day, blue – 100 day, yellow – 50 day
On the daily chart, we see that over the past week or so the IWM etf managed to rally right back up to its January and March highs. We also see that each of the price lows so far in 2018 have been so-called “higher lows.” This is now visibly exerting pressure against the black horizontal around the $160 mark and ultimately puts the odds significantly in favor of a breakout to new and sustainable higher highs.
Active traders and investors could look to either buy the next strong bullish reversal in the IWM ETF on a first significant daily close above the $160 area. The next upside target then becomes $165 and any strong daily bearish reversal should be taken serious as a possible stop loss signal.
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