Russell 2000 stuck between breadth thrust and death cross

Hitching a portfolio to small cap stocks has been a sure ticket for a rollercoaster ride.

We won’t even talk about the last two years of high volatility without any net progress. Just over the past month, the Russell 2000 went from a bullish breadth thrust to a ‘death cross.’

Will the death cross over-power the breadth thrust or vice versa?

Breadth thrust

What was the breadth thrust? From September 9 – 11, the Russell 2000 rallied more than 1% on three consecutive days. When coming from a 6-month low, that has happened only five other times over the past decade (see blue bars).

As the blue bars show, the Russell 2000 rallied strongly almost immediately every time. Despite the signal’s solid track record, the September 11 Profit Radar Report noted the over-bought condition against resistance (red line) and warned that: “The setup is not ideal for a buy signal.”

Barron’s rates iSPYETF as “trader with a good track record” and Investor’s Business Daily says: “When Simon says, the market listens.” Find out why Barron’s and IBD endorse Simon Maierhofer’s Profit Radar Report.

Death cross

Only 16 days after the breadth thrust, the Russell 2000 and corresponding iShares Russell 2000 ETF (IMW) suffered a death cross.

The red bars highlight every death cross over the past ten years. Although I’m not a fan of the fear-mongering death cross label, 1-2 months after each death cross the Russell 2000 traded lower every time. The last two death crosses (11/13/2018 and 9/2/2015) were particularly unkind.

Trouble shooting

Why did the breadth thrust fail?

Because the Russell 2000 could not make it above resistance. In fact, not only the Russell 2000 ran into resistance, the S&P 500 and Dow Jones Transportation Average did too.

I published this triple index resistance chart in the September 15, Profit Radar Report and warned that:

“The S&P 500, Russell 2000 and Dow Jones Transportation Average are at an inflection point. While the S&P 500 remains below purple trend line resistance, we allow seasonality and cycles to pull stocks back down.”

Conclusion

The two diametrically opposed Russell 2000 signals discussed above illustrate a much larger conflict. Over a month ago (September 1, Profit Radar Report) I found a lot of conflict among indicators.

Some breadth measures were strong, some weak, short-term cycles were up, but longer-term cycles down, etc.). Usually when that happens, the market stays range bound.

I personally would like to see lower prices, and the Russell 2000 death cross supports that conclusion. However, there are a number of sentiment readings that may limit down side in terms of size of length.

Continued updates, projections, buy/sell recommendations are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF e-Newsletter to get actionable ETF trade ideas delivered for free.

Advertisements

Russell 2000 Delivers New All-time High with Bearish Divergence

The Russell 2000 has been on a tear. On November 28, the R2K ended a 15-day winning streak when it touched red trend line resistance at 1,349 mentioned by the Profit Radar Report.

This pullback was to be temporary. The November 30 Profit Radar Report stated that: “The R2k is nearing an oversold condition and strong support at 1,309 – 1,296,” and recommended to buy R2k at 1,305. The corresponding level for the iShares Russell 2000 ETF (IWM) was 129.90.

Now the R2K is back at trend line resistance, but this time it carved out a bearish RSI divergence. There was no such divergence on November 25, which strongly suggested new all-time highs.

Bearish RSI Divergence, a Red Flag?

Under normal conditions, this bearish RSI divergence would be a serious red flag. However, the November 13 Profit Radar Report included the following observation:

The DJIA and Russell 2000 ended the week overbought, which normally will cause a pullback. However, if the S&P is truly in a wave 3 advance, stocks will continue to plow higher without much letup.”

The Russell 2000 has plowed higher ever since. The unique condition that allows for continuous gains despite on overbought condition is discussed here: S&P 500 Update – Expect the Abnormal?

Here is another statistic in favor of higher prices: Since 1979, there’ve been 12 other times when the R2K rallied at least 12 days in a row. A month later, the R2K was higher 10 times. 3 month later, the R2k was higher 7 times. 6 months later the R2k was higher 10 times.

The chart above provides long-term context for the R2K. The red trend line going back to 2011 is obvious resistance. If (and as long as) the R2K is able to sustain a break above this line, it may just continue higher.

Until it does, some caution is warranted.

Continuous updates for the Russell 2000, S&P 500 and other asset classes are available via the Profit Radar Report.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Small Caps Lead Market – Good or Bad Omen?

The Russell 2000 index of small cap stocks just pushed to new all-time highs.

Is this bullish for stocks?

To find out, I’ve plotted the S&P 500 against the IWM:IWB (small cap/large cap) ratio.

IWM is the iShares Russell 2000 ETF (NYSEarca: IWM). IWB is the iShares Russell 1000 ETF (NYSEArca: IWB).

Based on the ratio (currently at 1.06), the recent outperformance is by no means extreme.

What if we pretend for a moment that small cap outperformance was extreme (reading of 1.10 or greater)?

The red lines mark prior periods of small cap outperformance (IWM:IWB > 1.10). The S&P 500 (NYSEArca: SPY) couldn’t care less.

If anything, one could make an argument that extreme small cap underperformance works as buy signal. The dashed gray lines highlight readings smaller than 1.03.

 

The gray overlay of the iShares Russell 2000 Small Cap ETF (IWM), makes it clear that IWM is only trading 3% above where it was a year ago. The S&P 500 gained 13% since March 2014.

Small caps are often portrayed to be the engine that pulls the train (or at least the canary in the mine), but that’s not true.

We dispelled this myth in July when many jumped on the ‘small caps are down, the market’s going to crash’ bandwagon.

Perhaps recent small cap outperformance is a reflection of the idea that a strong dollar hurts multi-national large caps with overseas income more than small domestic companies.

But what happens if dollar strength takes a breather?

One more thought: Historically, small caps tend to under perform in the later stages of a bull market.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Initial 2015 S&P 500 Forecast

The S&P 500 is starting 2015 off with a thud, down 3% in two days. One exotic indicator featured in the December 21 Profit Radar Report warned of a very weak beginning of the year. Here’s a closer look at this indicator.

As my regular readers and subscribers to the Profit Radar Report know, I follow a ton of indicators.

Most of those indicators fall into one of three category buckets: Technicals, sentiment, seasonality.

In the December 21 Profit Radar Report I offered two projections based on Elliott Wave Theory. EWT is one of the more exotic technical indicators, but at times it offers insight no other type of analysis can provide.

The December 21 Profit Radar Report stated that: “Stocks may hit an inflection point once the S&P 500 and Russell 2000 record new all-time highs. About 25% of funds allocated for trading equities are tied up in the iShares Russell 2000 ETF (NYSEArca: IWM, Materials Select Sector SPDR ETF (NYSEArca: XLB) and VelocityShares Daily Inverse VIX ETN (NYSEArca: VXX). We’ll keep this allocation until we see new all-time highs. Thereafter, we will re-evaluate if further gains or a correction is more likely.”

Below is the chart with the two projections featured in the December 21 Profit Radar Report.

We sold XIV on December 23 for a profit.

By December 30, the S&P 500 and Russell 2000 delivered new all-time highs and we closed our XLB and IWM positions with gains, because the odds started to favor the more bearish projection.

Over the past two years corrections have generally been shallow, and it remains to be seen whether the S&P 500 (NYSEArca: SPY) will fall as low as projected in the chart, but for now we are glad to be out of stocks. Yesterday’s Profit Radar Report pegged the initial S&P down side target at 2,016.

A detailed 2015 S&P 500 forecast will be available (to subscribers of the Profit Radar Report) soon.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Is the ‘No Guts No Glory’ Small Cap Trade Over?

Small cap stocks tend to outperform large cap stocks starting in mid-December. After an incredible second half of December, stocks hit a wall and started to tumble and investors’ guts are being tested.

The December 15 article “Small Caps – The December ‘No Guts No Glory’ Trade?” identified buy levels for the iShares Russell 2000 ETF (NYSEArca: IWM).

Small cap stocks have a tendency to outperform large cap stocks for a fairly short period of time starting in mid-December.

Executing this trade took guts this year around, because the first half of December was pretty rough for stocks.

Nevertheless, in the middle of the month stocks bounced back strongly and the Russell 2000 started outperforming the S&P 500.

The chart below plots the SPDR S&P 500 ETF (NYSEArca: SPY) against the iShares Russell 2000 ETF (NYSEArca: IWM).

The Russell 2000 peaked on December 31, but the price action going into this high didn’t look right.

The December 30 Profit Radar Report warned that: “The Russell 2000 is near it’s all-time high, but RSI is lagging severely. We are closing out the IWM trade for a 5.3% gain.” We closed all are long equity position out at the same time.

Small caps (IWM) are holding up better than large caps (SPY), but we are glad to be out of stocks in general.

A more detailed 2015 S&P 500 forecast is available here: Initial 2015 S&P 500 Forecast

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

 

Buying Climaxes Soar to 1-Year High

Wall Street concluded 2014 with double-digit gains, the S&P 500 was up 11.34%, but stocks didn’t end on a high note.

The last week saw 393 buying climaxes, the highest amount since January 2014.

According to Investors Intelligence, buying climaxes take place when a stock makes a 12-month high, but closes the week with a loss. They are a sign of distribution and indicate that stocks are moving from strong hands to weak ones.

Hardest hit were utility, bank and insurance stocks along with the corresponding ETFs.

The Utility Select Sector SPDR ETF (NYSEArca: XLU), Financial Select Sector SPDR ETF (NYSEArca: XLF) and iShares Russell 2000 ETF (NYSEArca: IWM) were some of the prominent ETFs with weekly red candle highs.

The Profit Radar Report closed all equity positions on December 30, largely because the Russell 2000 (one of the leading indexes at the time) displayed sluggish internals.

The chart below plots the S&P 500 against buying climaxes. When looking at the chart it’s important to keep in mind that buying climaxes are reported on Monday of the following week.

Since most of the 2014 corrections were brief and followed by a V-shaped recovery, it appears as if buying climaxes marked lows instead of highs.

The second chart shows selling climaxes, which soared in early December.

The recent spike of buying and selling climaxes suggests that investors are torn and the period of calm may have come to an end.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

Small Caps – The December ‘No Guts No Glory’ Trade?

Historically, December is a good month to own small caps. However, the tendency for a nasty mid-month pullback is often overlooked. Will this correction send small caps even lower, or is it a good time to buy?

December has a reputation to be a good month for stocks, but that reputation is taking one on the chin as we speak.

In reality, December sports some seasonal ebbs and flows often ignored. Stocks tend to rally in the first part of the month, correct in the middle and finish strong.

Small caps in particular are subject to this up-down-up pattern. The December 7 Profit Radar Report referred to this tendency when it wrote that:

Small cap stocks tend to shine in December. History suggests we may see a pullback before the next surge. The green circles mark potential entry levels.

The updated Russell 2000 chart below includes the green circles mentioned in the December 7 PRR update.

The Russell 2000 in particular and stocks in general fell more than many expected, turning the potential year-end buy signal into a ‘no guts, no glory’ trade.

It certainly takes guts to push the buy button after this nasty sell off. Although seasonality suggests a favorable outcome for small cap buyers, it’s prudent to wait for technicals to confirm the initial stages of a reversal.

The iShares Russell 2000 ETF (NYSEArca: IWM) and Direxion Daily Small Cap Bull 3X ETF (NYSEArca: TNA) are two ways to play strong year-end small cap seasonality.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013.

Follow Simon on Twitter @ iSPYETF to get actionable ETF trade ideas delivered for free.