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Small Caps Trying To Catch Up; More Upside Possible

By Tiho BrkanStock MarketsJan 27, 2015 11:39PM ET
www.investing.com/analysis/small-caps-trying-to-catch-up;-more-upside-possible-239927
Small Caps Trying To Catch Up; More Upside Possible
By Tiho Brkan   |  Jan 27, 2015 11:39PM ET
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Chart 1: Russell 2000 has under-performed S&P 500 throughout 2014

Rusell 2000 vs S&P 500: 2013 and 2014
Rusell 2000 vs S&P 500: 2013 and 2014

Regular readers of the blog would know the reasons as to why I do not have any investment in US equities. The bull market is very mature, having started in March 2009 and already tripled in value (we are talking S&P here), while valuations and sentiment are both stretched on the upside. Consensus believes that US equities will continue to be the only game in town. Now...let us assume that consensus is right this time and US equities do happen to have another favourable year.

How would one play this?

Well, assuming I was a trader with a horizon of a several months, using tight stop-loss risk management, I wouldn't be buying large cap stocks such as the S&P 500 ETF (SPDR S&P 500 (ARCA:SPY)). Instead, I would consider trading a potential upside breakout in the small cap space, through the Russell 2000 ETF (iShares Russell 2000 Index (ARCA:IWM)).

The Russell 2000 had a very disappointing 2014, especially on a relative basis when compared to some of the other stock markets around the world (refer to Chart 1, above). Traders might remember how bearish the sentiment was during the October mini-panic, as every single blogger was pointing to small caps breaking down as a signal of a new bear market. However, it wasn't to be.

I've already mentioned this several times on this site, but it is worth saying again: The Russell 2000 tape is acting rather bullish as the price consolidates underneath major resistance. This isn't a topping pattern but rather the continuation of an uptrend. Therefore, more upside might be in the cards over the coming months.

Chart 2: The tape is bullish as price consolidates under major resistance

IWM Daily
IWM Daily

Small Caps Trying To Catch Up; More Upside Possible
 

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Small Caps Trying To Catch Up; More Upside Possible

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