Mish’s Daily: Russell 2000 — How Money is Made and Lost in Small Caps

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The Grandaddy Russell 2000 rallied close to its 200-week moving average (topic of our previous article) yesterday. On Wednesday, with rising yields once again, Gramps retreated.

In a bullish scenario, IWM continues to consolidate and rally in the coming days and weeks, eventually breaking through the 200-week moving average and continuing to climb. In the bearish case, if IWM cannot regain its 200-WMA after a period of consolidation, this key weekly technical level will become significant bear market resistance. That will most likely lead to lower lows.

IWM is in a bearish phase along with the other indices, but recent price action has shown relative strength. What should we watch out for?

While IWM struggles to break above its 200-week moving average, it has held its mid-June lows. SPY, DIA, and Nasdaq 100, all failed to do so.

Grandpa Russell’s companies are mid-cap and small-cap American businesses that are less well-known brands and have little exposure to international markets, so the strong US dollar has less impact. The Russell 2000 has violated the 200-weekly moving average several times before. In fact, with every crisis it was the NASDAQ that led while small caps remained weak. The reasons for that were low interest rates, low corporate tax rates and corporate buybacks. Small-cap companies did not have the same benefits from those factors.

In fact, this highlights the recent resilience of small and mid-cap stocks compared to large-cap stocks in the face of inflation, higher rates, slowing economic growth and US dollar strength. Grandpa Russell still needs substantial work to the upside, but a potential multi-week bottom might be forming.

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ETF Summary

  • S&P 500 (SPY): 360 pivotal support and resistance at 380. 362 caution; 360, 351, 340 upside 375, 380, 385
  • Russell 2000 (IWM): 168 support, 173 support.
  • Dow Jones (DIA): Continuing to hold 299 support; 308 resistance.
  • Nasdaq (QQQ): 267 support, 274 resistance.
  • Regional banks (KRE): 60 support, 64 resistance.
  • Semiconductors (SMH): Support at 175 and resistance at 182.
  • Transportation (IYT): Support at 202 with 208-210 resistance.
  • Biotechnology (IBB): 115 support, 122 resistance.
  • Retail (XRT): Long-term support at 55; resistance at 62.

Mish Schneider

MarketGauge.com

Director of Trading Research and Education

Wade Dawson

MarketGauge.com

Portfolio Manager

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