Small-Caps Take the Lead: Can They Hold It?


The Russell 2000 ETF (IWM) rose from the ashes in late September and surged above its summer highs with a double-digit advance. This is quite amazing considering that IWM closed below its 200-day SMA on 24-Sept and was seriously lagging less than a month ago. IWM is leading over the last few months, but still short of a new high and lagging SPY year-to-date. Note that SPY and QQQ have yet to take out there early September highs.

I missed the move in IWM because it was not on my radar after dipping below the 200-day SMA. SPY and QQQ, in contrast, were on my radar because they held well above their 200-day SMAs, formed picture-perfect falling wedges and broke out with gaps. SPY was featured in ChartWatchers on 2-October. IWM has returned to my radar because of the recent breakouts and outperformance.

The price relative gives us another reason to have IWM on our radar. This relative strength measure broke above its 200-day SMA for the first time since September 2018. The chart below shows the IWM:SPY ratio falling from July 2018 to March 2020 as small-caps seriously underperformed large-caps. IWM briefly outperformed with the bounce off the March lows (late March to early June), and then performed in-line as the ratio flattened the last few months.

The break above the 200-day is the first positive for small-cap relative performance in a long, long time. A follow through break above the resistance zone would show further relative strength in small-caps. This would be a momentous change. As such, I will be watching small-caps and some related industry group ETFs that may benefit from such a shift.

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Arthur Hill, CMT

Chief Technical Strategist,

Author, Define the Trend and Trade the Trend

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Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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