Rising interest rates, strong dollar and trade war concerns are the fundamental reasons that made investors very hesitant to put money back into the market. The hesitation showed up in the price action as sideways consolidation for the last four months.
While the vast majority were in a wait-and-see mode, the smart money quietly put money into the small cap Russell 2000. The IWM quietly broke out to make an all time new high last week while all the other major indices remain range bound.
The small cap index has been under performing for the last two years, especially during 2017. The small cap has ways to go to catch up with the other indices.
Fundamentally, the small caps are better positioned to weather a strong dollar, and fallout from the Trump administration’s controversial trade policies. Plus, the group benefits more directly from lower effective tax rates enacted last year than their larger peers.
Technically, the IWM price action making an all time new high is a solid proof that the correction in small caps is over. As we are writing this blog, the futures market rallied over 15 points at open on Sunday evening due to the trade war on hold news. This strong futures price action is indicative that the general market will catch fire on Monday with this trade war on hold news.
The S&P 500 cash index is stepping into the 7th weekly bar, 12th daily bar on the 2nd daily cycle within the weekly cycle on Monday 05/21/2018. If the price action takes out the previous swing high at 2742.10 on Monday, it will point to a daily cycle inversion, which will negate all the sideways correction occurred last week.
Enjoy the rally and take part in the ever present money making opportunities!