Last week I was a moderator for one virtual small-cap conference hosted by Benzinga. My presentation focused on small cap opportunities based on technical and sentiment analysis of the Russell 2000 Index (RUT – 2,221.48) and the iShares Russell 2000 ETF (IWM – 220.61). Much of what I’ve presented revised concepts you’ve probably seen in this Weekly Commentary since December.

In particular, I discussed that shortly after the RUT broke out above its 2018 high at the end of last year, small caps represented the greatest opportunity for investors as overall short interest in Russell 2000 component stocks was (and remains) historically high. By comparison, overall short interest in components of the S&P 500 index (SPX – 3,974.54) and the Nasdaq 100 index (NDX – 12,979.11) was at historically low levels, leaving less room for Short covering rallies for names with larger market caps remained.

At the same time, I mentioned that small caps are prone to short-term pullback as small cap stock option buyers display extreme optimism that usually comes before weakness. Additionally, I’ve shown these two graphs that captured IWM and RUT, showing the susceptibility to short-term setback. My two technical concerns were:

  1. The IWM recently peaked near the $ 235 level, up around 20% year-to-date for the ETF, along with its 50-day and 80-day moving averages as potential areas of support.
  2. A long-term graph of the relative strengths of the RUT and SPX bumping into a trendline that has marked lower highs since 2014.

These graphics are displayed immediately below.

MMO1March29

MMO2March29

My findings from these graphs were as follows:

  1. If the short-term weakness persisted, I could see the IWM pull back to the $ 210 area where the 80-day moving average was. My thought was that a move below the popular 50-day moving average of $ 220 could wash away weaker hands. In addition, the 80-day moving average, which hit lows in late October / early November, was close to levels 10% above the 2020 closing price and 10% below the March 15 closing high. A 10% decline from the intraday high in mid-February to the intraday low in early March resulted in strong buying.
  2. Changes in the long-term relative strength of the RUT versus SPX typically take years, not months. This suggests that small caps may be on the verge of outperforming their larger cap counterparts for a long time – even if there may be short-term hiccups.


According to my comments on Twitter after close of trading on March 24th, the RUT was trading almost 10% below its closing high in mid-March, very similar to the price movement from mid-February to early March. On March 24, the IWM closed at $ 212.04, with $ 210.60 lower than 10% from its closing high on March 15. Buyers actually appeared after a brief move below $ 210.60 on Thursday morning.

The jury is not yet sure whether the move from Thursday morning lows will be sustained, followed by a move to new highs. If you weren’t long on Wednesday afternoon or Thursday morning, it’s probably best for traders to see at least a couple of closes above the $ 221 IWM level, which is where the 50-day moving average sits extended trendline connecting lower highs from February to March.

However, the $ 225 is another potential level of resistance even if the IWM rises above $ 221 in the coming days. The $ 2,225 level represents a breakeven point for those who bought the breakout above the trendline on March 10, as shown in the updated graph below. If the IWM doesn’t go beyond the $ 221-225 range, we could at least see a retest of the Thursday morning lows.

MMO3March29

While I like the fact that the support levels I saw before Thursday’s low fell, I don’t like that this pullback has caused little fear among stock option buyers, which you will tend to see at significant lows.

When the IWM peaked earlier this month, the cumulative buy-to-open put / call volume ratio for IWM components after 10 days was at a historically low value of 0.34 – not very different from the current value.

This would mean rallies could be short-lived, like those of early March to mid-March, which were resolved with an immediate retest of the early March lows last week. A higher level of fear among equity option buyers regarding IWM components may be required before the next significant short covering rally in this group occurs.

MMO4March29

If you are looking for some technical permit to get into a bullish large cap tech trade, I think it is best if you are looking for resistance to be taken out. In particular … look for the NDX to climb back above some combination of its 40-day moving average, which marked the high of last week. Additionally, the 13,000 and 13,037 levels, which are a 50% Fibonacci retracement of the recent closing highs and lows, remain significant. ”

– – Monday morning outlook, March 22, 2021

If I take equity risk, I still prefer small caps to large caps, especially when compared to larger cap tech stocks. While the NDX hit a bottom in an area 10% below its February high earlier this month, the fear the pullback is causing is subsiding, even though the NDX failed at key potential resistance levels that I discussed last week.

Regardless of whether you enter round numbers, moving averages, Fibonacci retracements or year-to-date breakeven values, the NDX is below 13,000 for the week and its 2020 year is 12,888 (albeit barely). Additionally, a rally was halted early last week after a Monday close above 13,037 or a 50% retracement of the February high and low to its declining 40-day moving average.

MMO5March29

The second half of March was nothing to write home about for this group and the shorts are of no help, perhaps using rallies to restore short positions as short interest in components of the Invesco QQQ Trust increased nearly 7% is series ETF (QQQ – 316.00) in the last Short Interest Report. Given the brief interest in QQQ components at multi-year lows, increasing short selling activity could be a major headwind, which, according to the charts below, I don’t see as a major risk factor for the names of smaller caps.

Regardless of whether it is NDX or RUT, more work needs to be done to overcome the short-term resistance level. But beyond the near-term tech backdrop, I’d still highlight smaller caps as I would expect if stocks rally, small-cap names would be the lead.

MMO6March 29

Todd Salamone is Schaeffer’s Senior VP of Research

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