Russell 2000 : How Money is Made and Lost in Small Caps

2 years ago 592 views 5 min read

Michele “Mish” Schneider

Director of Trading and Education

MarketGauge.com

Russell 2000 : How Money is Made and Lost in Small Caps

Written by Michele ‘Mish’ Schneider and Wade Dawson

The Grandaddy Russell 2000 rallied close to its 200-week moving average (topic of yesterday’s article) yesterday.

Wednesday, with rising yields once again, Gramps retreated.

In a bullish scenario, IWM continues to consolidate and rally in the coming days and weeks, eventually breaking through the 200-week moving average and continuing to climb.

In the bearish case, if IWM cannot regain its 200-WMA after a period of consolidation, this key weekly technical level will become significant bear market resistance.

That will most likely lead to lower lows.

IWM is in a bearish phase along with the other indices, but recent price action has shown relative strength. What should we watch out for?

While IWM struggles to break above its 200-week moving average, it has held its mid-June lows.

SPY, DIA, and Nasdaq 100, all failed to do so.

Grandpa Russell’s companies are mid-cap and small-cap American businesses that are less well-known brands and have little exposure to international markets, so the strong US dollar has less impact.

The Russell 2000 has violated the 200-weekly moving average several times before. In fact, with every crisis it was the NASDAQ that led while small caps remained weak.

The reasons for that were low interest rates, low corporate tax rates and corporate buybacks. Small cap companies did not have the same benefits from those factors.

In fact, this highlights the recent resilience of small and mid-cap stocks compared to large-cap stocks in the face of inflation, higher rates, slowing economic growth, and US dollar strength.

Grandpa Russell still needs substantial work to the upside, but a potential multi-week bottom might be forming.

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