From a BNN morning commentary: Some research by Raymond James Chief Investment Strategist, Jeffrey D. Saut, suggests that the narrow range of performance of the Russell 2000 small cap index is the tightest in 35 years and on a monthly basis, there have only been three other times since 1953 when the range has been more tight. More importantly, history shows that post this kind of low dispersion trading, small caps have earned an average of 21-31% on a forward one-year basis.
According to Thackray’s Investors Guide, US small caps tend to outperform from a seasonal perspective from December to March. So there seems to be a case building for us to take a look at the small caps in the US – as represented by the Russell 2000 index. Below is a chart of the iShares Russell 2000 index ETF IWM. As you will note, I’ve drawn what appears to be a pretty obvious lid at around $117 for this ETF. A break through this level might suggest a return to its old high of the mid $120’s. Not a bad move, should we see the breakout. I didn’t post a daily chart with the near termed timing indicators I usually follow, as there really isn’t much point getting excited about this sector until we see that $117 price point broken by a few days.
What about Canadian small caps?
The iShares Canadian Small Capped ETF (XCS-T) paints the picture of a very volatile index. Indeed, while there is at least some measure of correlation by the US small capped index to its big brother large capped index the S&P500 – there is less correlation between the Canadian small caps and the larger capped TSX60 – or even the TSX300 indices. This is due to a number of reasons – diversity in sectors, number of stocks in the index, and the definitions of what constitutes a “small capped stock” in the US vs. Canada. So treat these two animals differently –don’t expect them to move in tandem.
Despite the massive volatility in this ETF – one can see that there appears to be some pretty strong historic support coming in at around current levels (that is, $12.50/share). Current resistance is at $13.50. Look at the size of the candles since July. The small caps have been whipped around like a pro showing us his yo-yo tricks. This volatility is not uncommon for XCS – take a look at the candlestick size in 2014. Big up/down weeks. This is not an ETF for those who suffer from a heart condition. But if you can handle the crazy moves, it may be a trade-off of the $12.50 floor – or after a break of the $13.50 resistance. The chart shows enough chop to suggest that the index could move rapidly to $15 – if Venus aligns with Mars for the sector – so to speak. I haven’t seen any seasonal work on this sector- so no edge to offer you on that discipline. But it looks interesting at this juncture for traders and speculators.
Keith on BNN’s 1:00pm MarketCall show this Thursday November 5, 2015
I haven’t done an afternoon show in a while, so this should be fun.
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