We have heard many discussions on whether small cap stocks and the Russell 2000 ETF (IWM) really matter for the broader stock market.
Here are a few talking points:
- For 10 years IWM has underperformed, so who cares?
- The tech and growth sector will continue to go up regardless, so if interest rates are lowered-it could help small cap stocks, but growth stocks will rally even more-in order words, the bifurcation continues
- Small caps are incredibly underpriced, and are the next big more-Druckenmiller thinks so and so do a few other billionaires
- Small caps reflect the reality of poor economic growth and will eventually drag down the growth stocks as a recession is coming.
The interesting thing is that all these points are feasible and possible.
So where do we go?
Perhaps we can draw some conclusions from the daily price chart of IWM.
Looking at Real Motion, the momentum has not cleared the 50-DMA (blue) since May.
So, the first thing we want to see is a substantial gain in momentum.
Secondly, IWM has underperformed SPY.
More importantly, IWM has not cleared the Bollinger Band or zero line in Leadership since 2023.
Hence, until we see some real Leadership IWM is rangebound.
Furthermore, the Russell 2000 IWM remains stubbornly in a caution or warning phase. The price sits below the 50-day moving average.
IWM needs two closes above the 50-DMA, and better still, the price needs to clear 205.
What conclusions can we draw right now?
Yeah yeah we love our Sister Semiconductors SMH and NVDA.
Nonetheless, we still cannot say for sure which scenario plays out-
Number 1: For 10 years IWM has underperformed, so who cares?
Or
Number 4: Small caps reflect the reality of poor economic growth and will eventually drag down the growth stocks as a recession is coming.
Twitter: @marketminute
The author may have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not represent the views or opinions of any other person or entity.
