Russell 2000 and Transports at Crossroads?

The Russell 2000 (RUT) and Dow Jones Transportation Average (DJT) racked up some pretty significant losses since their 2015 all-time highs.

From the 2015 peak to the 2016 trough, the RUT lost as much as 27.23%, DJT as much as 31.22%. The S&P 500 lost ‘only’ 15.20%.

It was the prevailing opinion for much of 2015 and early 2016 that the RUT and DJT would lead U.S. stocks into the next bear market.

It is correct that small cap underperformance is one of the stages of an aging bull market, and in line with our analysis (view 3 Stages of a ‘Dying’ Bull Market). However, the timing for an immediate bear market didn’t seem right.

The February 11 Profit Radar Report listed six reasons why stocks are likely to rally. The ‘six reason buy signal’ is also discussed here.

After almost three weeks of rising prices (RUT up 11%, DJT up 17%), the RUT and DJT have arrived at their first inflection point.

Russell 2000 (RUT)

The RUT is back-testing the ascending green trend line (currently at 1,045), which originates at the March 2009 low. Sustained trade above this trend line is bullish until the signal is reversed.

Dow Jones Transportation Average (DJT)

The DJT is threatening to break above the 7,400 – 7,500 zone. This zone served as support a few months ago.

This is not only price resistance for DJT, it’s also momentum resistance as DJT’s prior rallies failed at similar RSI readings.

Conclusion

When the Profit Radar Report issued a buy signal at S&P 1,828, it wasn’t clear whether this rally would only move to the initial up side target at 1,950 or beyond.

Based on investor sentiment, there was a distinct chance that a runaway rally (with higher targets) would develop.

The S&P is not in the clear yet, but the RUT and DJT charts may help gauge the broad market’s prospects. RUT and DJT above their respective resistance levels is a positive for the S&P and other indexes.

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, 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.

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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.

 

Simon Says: Here is Big Support for Small Cap Stocks

Some say if it’s too obvious, it’s obviously wrong, but when it comes to the Russell 2000 you may ask: How could you have missed this? The media proclaimed the Russell 2000 in a ‘correction’ just before it bounced from key support (three times).

Sometimes the financial media sacrifices accuracy (or neutrality) to deliver the WOW effect.

That’s why we read headlines like this:

“Scary October Start for Stocks; Russell in Correction.”

Perhaps this particular WOW-focused media outlet felt it was close enough to Halloween to paint a 1.32% S&P 500 and 1.54% Russell 2000 drop as ‘scary.’

A correction is often (arbitrarily) defined as a 10% decline. From March to May and once again from July to September, the Russell 2000 lost 10%. A correction? Maybe.

The chart below shows why labeling anything Russell related as ‘scary’ or ‘correction’ was premature.

Every pullback, or ‘correction’ since November 2013 ended at support at 1,080.

I picked on this fear-mongering headline in the October 1 Profit Radar Report and commented that:

“The Russell remains above support around 1,080. I suppose that even novices are able to spot this support level by now, so it probably doesn’t mean as much as it did in February and May. Nevertheless, the odds for some sort of bounce from here are above average.”

Well, I was kind of wrong. 1,080 meant just as much last week as it did the prior three times it was touched.

At some point this support will become too obvious for its own (or investors) good, but one thing is for certain:

Correction or not, bears cannot make any real progress unless the Russell 2000 breaks below 1,080.

The corresponding support level for the iShares Russell 2000 ETF (NYSEArca: IWM) is 107.

Will the Russell 2000 break below 1,080 in October? Sunday’s special Profit Radar Report includes detailed analysis on what new lows would mean for the stock market and whether the market is carving out a major top.

The conclusion is not ‘scary’, but probably surprising for most people.

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.

This Bearish Russell 2000 Pattern is Still Alive

The Russell 2000 has been taking it on the chin: It’s been the scapegoat for the April sell off and, unlike other indexes, wasn’t able to report new all-time highs in June. Will the Russell 2000 catch up or lead the broad indexes lower?

The Russell 2000 has been the ‘black sheep’ and ‘scapegoat’ of market indexes. Small cap stocks led the April sell, losing as much as 10%, and lagged the May/June rally.

What’s the deal with small caps? Will they catch up or lead the broad market lower?

Here’s what the Russell 2000 (Chicago Options: ^RUT) chart says:

Support

On May 6, the Russell 2000 closed below the 200-day SMA for the first time since November 21, 2012.

The May 7 Profit Radar Report made this observation: “Many investors follow the 200-day SMA. A close below it is generally considered a sell signal and/or bear market. The path of least resistance would be to jump on the sell signal bandwagon, but that’s premature in my humble opinion. The Russell support cluster at 1,100 – 1,080 seems more important than the 200-day SMA at 1,115.”

The small cap/large cap ratio (IWM/IWB) chart IWM = iShares Russell 2000 ETF (NYSEArca: IWM), IWM = iShares Russell 1000 ETF (NYSEArca: IWB) – featured in the same Profit Radar Report also suggested that important support is still ahead (chart below).

Here is an updated version of the IWM:IWB ratio chart plotted against the S&P 500 (NYSEArca: SPY). Green trend line support held and buoyed small caps and the S&P 500.

Resistance

1,080 is also the neckline of a possible head-and shoulders pattern. The May 11 Profit Radar Report stated that: “The Russell 2000 has kept the possibility of a bearish head-and shoulders pattern alive, as the left and right shoulder sport near-perfect symmetry. The ascending red trend line at 1,188 appears to be the dividing line between bullish and bearish bets.”

Summary

For now the Russell 2000 is trading between support and resistance. The weak IWM:IWB ratio recovery hints at further small cap weakness, but for now there are different ways to play this constellation:

  • Sell against resistance
  • Buy against support
  • Buy once resistance is busted
  • Sell once support is broken

Perhaps even more revealing is the current S&P 500 constellation. The 2014 S&P 500 forecast projected an S&P 500 high around 1,955 in May 2014.

The S&P 500 reached this target in June and peeled back. Does this mean a significant top is near? All the details are available in an update to the original 2014 S&P 500 forecast:

Updated 2014 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.

How Bad is Small Cap Underperformance for the Broad Stock Market?

The small cap sector has lost as much as 10% while the Dow Jones and S&P 500 are still within 1% of their all-time high. This chart illustrates the discrepancy better than any other. How bad is this for the broad stock market?

Small cap stocks have been taking it on the chin. The Russell 2000 lost as much as 9.85%. How bad is small caps’ performance relative to large caps?

Bad! Here’s a look at the small cap:large cap ratio (published in yesterday’s Profit Radar Report). The chart below shows the ratio between the iShares Russell 2000 ETF (NYSEArca: IWM) and the iShares Russell 1000 ETF (NYSEArca: IWB).

Small caps erased an 11-month performance edge in less than 6 weeks. The last time the IWM:IWB dropped as far was from July – October 2011.

The second chart plots the S&P 500 (SNP: ^GSPC) against the IWM:IWB ratio. The July – October 2011 small cap underperformance (big IWM:IWB drop) was a coordinated decline that saw large and small caps decline at the same time.

Small caps just fell much harder than the S&P 500.

This time is different. Small caps are down significantly while large caps (S&P 500 and Dow Jones) remain within 1.5% of their all-time highs.

At the same time, the Russell 2000 closed below the 200-day SMA for the first time since November 21, 2012.

However, this may be more of a bear trap than a sell signal. There is a must hold support area that’s more important (because not as obvious) and less prone to false signals than the 200-day SMA.

Must hold support is outlined in yesterday’s Profit Radar Report.

Personally, I feel that there’s been too much bearish media coverage for stocks to enter an immediate, prolonged correction (must hold support will tell me when I’m wrong), so I’m also looking at key resistance. The kind of resistance that should U-turn a bounce.

Must hold support is discussed in yesterday’s Profit Radar Report. Key resistance is revealed here:

The Secret Dow Jones Barrier Every Investor Should Know

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.

Money is Rushing from Small Caps into Large Caps

Money is always rotating from one segment to another. Sometimes this rotation is bullish, other times it’s bearish. Right now money is flowing from small caps into large caps, a sign that investors are losing their appetite for risk.

Somebody flipped the switch from ‘risk on’ to ‘risk off.’

There are many measures of ‘risk on – risk off.’ Almost all of them are lagging.

I usually don’t care for lagging gauges, but this one has an interesting twist.

Illustrated in the chart below is the ratio between the iShares Russell 2000 ETF (NYSEArca: IWM) and iShares Russell 1000 ETF (NYSEArca: IWB).

A high ratio means that investors prefer small caps over large caps (risk on) and vice versa.

Although the ratio has been stuck in a range since August 2013, up until recently more money was flowing into the small cap Russell 2000 ETF than into the large cap Russell 1000 ETF.

This changed rather abruptly.

Here’s what makes this IWM:IWB ratio interesting:

The ratio has dropped to levels of prior support. As the dashed purple lines indicate, ratio lows generally occur fairly close to S&P 500 lows.

Obviously, the IWM:IWB is not at a new low, but the gray lines show that prior tests of this low caused temporary S&P 500 (NYSE: SPY) bounces.

This may be the case here too. A drop below the lower green support line, however, may indicate a change of investor behavior.

Less appetite for risk generally translates into lower prices.

While the IWM:IWB ratio has yet to drop below support, another indicator has already triggered a sell signal. More details here:’

MACD Triggers the Year’s Most Infamous Sell Signal

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.

Leading U.S. Sector ETFs Send Mixed Messages

Every bull market is built on the shoulders of strong leading sectors. Things tend to get dicey when the leading sectors start to lag. Here’s a look at three leading sector ETFs and some interesting developments.

Looking at leading or lagging sectors can provide clues about the overall health of a bull market.

This article will look at three leading sectors.

Retail Sector – SPDR S&P Retail ETF

The SPDR S&P Retail ETF (NYSEArca: XRT) soared 42.29% in 2013 and was heading for a strong finish (many thought). Retailers love the holidays (November/December), but the 2013 holiday period wasn’t kind to retailers.

As the XRT chart shows, retailers topped in the last week of November and are threatening to break below green support.

A breakdown around 83.50 and 80 for XRT would spell trouble.

Financial Sector – Financial Select Sector SPDR ETF

The financial sector has been leading the S&P 500 for much of 2013 and confirmed Wednesday’s new S&P 500 high (XLF closed 2013 with a 35.52% gain).

Unlike the S&P 500, the financial select sector SPDR (NYSEArca: XLF) is trading well below its all-time high. In fact, it is bumping against 50% Fibonacci retracement resistance at 22.01.

It will take sustained trade above 22.01 to unlock higher up side targets.

Small Cap Stocks – iShares Russell 2000 ETF

Small cap stocks tend to outperform large cap stocks in December/January, but the iShares Russell 2000 ETF (NYSEArca: IWM) has been on fire almost non-stop, up 38.69% in 2013.

Next notable resistance for IWM is around 119 (2002 Fibonacci projection).

Corresponding resistance for the Russell 2000 Index is at 1,166. Unlike IWM, the Russell 2000 Index is already trading above this resistance.

Summary

It’s said that a fractured market is a sick market. We are certainly seeing some ‘unhealthy’ divergences between the various leading sectors (this doesn’t even take into consideration the most recent Dow Theory divergence).

However, XLF and the Russell 2000 Index are at the verge of overcoming their resistance levels. A strong financial sector and small cap segment could also buoy the S&P 500.

The strong 2013 performance of all three leading sectors begs the question if there’s any ‘gas left’ for 2014. The following articles takes a look at how much up side is left:

Did the Strong 2013 Market Cannibalize 2014?

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (stocks, 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.