IWM Has Damaged Out: Sturdy Purchase (NYSEARCA:IWM)

Small-cap shares have had fairly the run to finish 2023. They’ve been continual underperformers for years, languishing because the larger-cap indices have flown to new highs. Nonetheless, that has ended, and small caps are effectively and really main the best way proper now. Given the manner cash is rotating into small-cap shares, the truth that the index has damaged out of its multi-year vary, and its correlation to declining rates of interest, I consider the iShares Russell 2000 ETF (NYSEARCA:IWM) is an incredible lengthy alternative heading into 2024.

Earlier than we dig into the bull case, there’s a important caveat brief time period, from excessive overbought situations and out-of-control sentiment. Nonetheless, as soon as these momentary points have handed, the IWM needs to be off to the races once more.

A serious breakout

The IWM was in a variety of about $160 to about $197 for the higher a part of two years, as you’ll be able to see under within the weekly chart. Needless to say the Nasdaq (COMP.IND) and S&P (SP500) indices have made new highs in that timeframe, whereas the IWM was merely rangebound. That, nevertheless, isn’t any extra.

The triple prime at ~$197 was cleared in an enormous manner, and the IWM is now at $204, buying and selling above the breakout vary for a few weeks now. In my opinion, this period of time forward of the prior buying and selling vary confirms the breakout.

I’ve famous the weekly PPO is definitely fairly low even supposing we’ve seen a completely epic rally prior to now two months, and on the weekly chart, IWM can go a protracted, good distance larger earlier than it’s overbought. That’s precisely what I believe will occur.

If we zoom in to the day by day chart, we are able to see excessive ranges of bullish conduct, however a number of causes for short-term warning.

I’ve famous the breakout stage with the assist strains drawn in under, so you’ll be able to see the road within the sand for the bulls. I’d actually wish to see IWM come again and check the $197 space – or one thing near it – after which bounce larger once more. Whether or not we get that or not stays to be seen, however the backside line is so long as the IWM is forward of the prior buying and selling vary, it’s a purchase.

The warning is available in with the extraordinarily overbought nature of the index proper now. Take your decide however principally the whole lot is screaming for a pullback of a while. The index is a staggering 13% forward of its sharply rising 50-day easy transferring common. The PPO is 3.6, which is the best worth we’ve seen in a while. The 14-day RSI remains to be over 70, effectively into overbought territory.

Now, whereas these indicators are displaying that IWM has seen relentless shopping for strain, that is additionally extremely indicative of bull market conduct. So, whereas I believe the IWM wants a pullback to consolidate a few of these current positive aspects, it additionally provides me a number of confidence that this breakout is the true deal and that IWM goes to proceed to march larger into subsequent yr.

Sentiment is extraordinarily stretched

There are many methods to measure sentiment, and so they all have their deserves. Nonetheless, I choose the target ones that merely observe the place cash is flowing moderately than sentiment surveys, for example. The charts don’t lie, and under, I’ve a collection of sentiment indicators that every one level to 1 factor, and that’s the undeniable fact that bullish sentiment on Wall Avenue is extraordinarily prevalent. Given sentiment is a contrarian indicator, I’m on excessive alert for a pullback.

Earlier than we have a look at these, let me say yet another time that none of this modifications my view that IWM is a purchase over $197; that is merely a short-term notice of warning.

The primary panel is solely the 50-day fee of change of the IWM. That is the cumulative value motion for the previous 50 days, charted in line format. We are able to see the newest studying of +17% is stretched. This by itself isn’t a promote sign by any means, nevertheless it does present that the bullish motion we’ve seen has been fairly one-sided.

The second panel is the bullish percent index for the S&P 500. I do know the S&P 500 and IWM are usually not the identical factor, however these sentiment indicators apply to all equities, and their alerts are fairly helpful for the IWM as effectively.

The BPI is at the moment 82, which has very reliably marked short-term tops in equities prior to now couple of years. This doesn’t imply it can’t go larger, however the odds of a pullback are fairly elevated based mostly upon this sign’s reliability within the current previous.

The underside two panels are the chances of S&P 500 shares over their 50-day and 200-day transferring averages, respectively. Once more, these are fairly dependable when it comes to calling short-term tops and bottoms, and proper now, each are at excessive ranges which have generated short-term tops.

Sentiment, in my opinion, is the largest cause to be cautious on equities proper now. When buying and selling is as one-sided because it has been not too long ago, I get involved.

Rates of interest and seasonality

There are different concerns moreover the worth chart itself and short-term sentiment points, and we’ll check out these now. Whereas sentiment is a short-term adverse, rates of interest and seasonality are medium-term positives, and once more, assist my purchase ranking on the IWM. Let’s begin with a chart of the 10-year Treasury fee (US10Y).

Everyone knows charges plummeted months in the past and are effectively under their prior highs. That’s been terrific for equities, however try the correlation to the IWM within the backside panel. What this says is that over a 50-day rolling interval, the IWM and the 10-year Treasury have a correlation of -0.96, that means they’re transferring virtually completely inversely to 1 one other.

As long as the 10-year yield stays under that vital stage between about 4.00% and 4.10%, based mostly on this knowledge, the IWM has bullish tailwinds from charges.

Lastly, seasonality additionally favors the bulls. Under is knowledge from the previous 5 years, and what it reveals is that January is usually fairly month for small caps.

January’s common achieve prior to now 5 years is 2.7%, or 32.4% annualized. IWM’s common annualized achieve per 30 days for the entire yr over this era is 12.8%, so January is almost 3 times extra bullish. That means this breakout rally has some endurance, at the very least over the following few weeks. Issues begin to get dicey in February and March, in order that’s definitely one thing to bear in mind, however for now, this rally seems to be prefer it has legs to me.

Wrapping up

The rally we’ve seen in small caps prior to now two months has been completely breathtaking. Cash could be very clearly rotating into the area, and so long as the IWM stays over $197, it’s a powerful purchase in my opinion. That stated, we’ve some short-term points that I discover fairly regarding, and I’d actually wish to see a small pullback and consolidation over $197 earlier than the rally continues.

I’m putting a powerful purchase on iShares Russell 2000 ETF, with the caveat that short-term – I’m speaking in days, not weeks – sentiment is unsustainably excessive. However as soon as that’s labored via, giddy up.