US Small caps may be the next sector to breakout

August 6, 2021No Comments

What we’re going to talk about today is just a fairly quick, and to the point topic, which is a sector that I feel has the potential for becoming a real winner into the fall. And I want to give you a heads up because it’s one of the sectors that I almost definitively never say anything is absolute, but I’m very, very interested in buying into this sector myself. But as you will see on the charts that I’m about to show you, we’re not quite ready. So this is a setup I’m giving you the heads up on a sector that I think has tons of potential for the winter. And it’s just setting up beautifully.

We’ll need a couple of conditions to prove that. So we’ll look at those conditions, but I’m, I’m kind of giving you a little bit of insight into the kind of thing that we at ValueTrend look at. Now, I want to point out that this is something that you have to monitor carefully before you make your decisions, because if you don’t get the setup, then you don’t buy this position. All right. So I’m going to give you the setup that I am looking for personally, and we’ll see what happens with this sector. And the sector happens to be not really a sector, but a market capitalization. And it’s the US small cap stocks. Now this group of stocks, it contains a lot of different individual sectors, but because they’re smaller capitalized in nature, they’re a little bit thinner. They’re a little bit more volatile. So they do tend to have some commonalities, even though, you know, one might be biotech and, and another might be doing construction for all we know, but the commonality is that they’re not widely traded, like say an IBM Or an Exxon mobile, or whatever it is that we’re talking about. When we talk about large caps, these are lesser traded, lesser known, lesser followed stocks that have a similar volatility profile, if not moving in identical formation. So let’s look at the Russell 2000 ETF, which is IWM. And let’s just see what we’re looking for if we were to consider buying this chart. So this is the ETF, the iShares Russell, 2000. It’s been around a long time. I’ve just circled a few periods of time that the ETF moves sideways. You can see in 2017 from the relatively the beginning part of the year into, around September, the market was relatively flat on this ETF. And then it popped really from September, October and on, and you can see it has a nice move, same thing in 2019, you know, really from the beginning of the year, say February, it was very sideways, very contained up and down.

Then it popped. Now COVID crash came along, but we have to forgive that because that was a black Swan event an anomaly, and clearly if we had executed the trade, we could have made some profit if we’d been quick on our quick and nimble on our feet, but we’re not going to anticipate another COVID crash or something like it. We can’t anticipate these things. Look at the terrorist act of 2001, you couldn’t anticipate these things happening. So we have to invest assuming that the patterns that were we’re looking at will play out the way they usually do. So. So in fact, the IWM chart did break out quite nicely back in 2019. And it wasn’t until early 2020, when the COVID crash happened, that the pattern failed. So we have exactly the same setup. I mean, what a consistent pattern on sector or let’s say capitalization list on an ETF.

Once again, since the beginning of the year, it really seems to start somewhere around January, February, every single year, stock finds a lid and then trade sideways, but then it’ll break out. So here’s the two things from a technical perspective that we, as investors should be looking at, if we wish to trade this small cap, ETF IWM or one similar to it, we can either trade within this range, which might be buying it somewhere down near, say $210, maybe 215, and selling it near 230. That’s not a bad strategy, or just buying it at the bottom of it range and seeing if it’ll break out, like it seems to every year or we wait for the actual breakout to be confirmed. So that’s the safer way of trading it because there’s always the potential that you can, you get some sideways movement and then a breakdown occurs.

And that could very well happen because this time we did see a massive move on this ETF leading into the year 2020. However, I am encouraged that that massive parabolic move is taken out by its sideways movement. So this is actually a very, very healthy looking chart, as far as I am concerned. And I want to show you one other chart, and that is the seasonality. You know, I’m only looking at this, going back to the end of 2019. So it’s a couple of years old. I could have updated it, but I happened to have it on my, my saved photos, but basically this is a month bang on seasonality going back to 2010. And really, as you’ve just seen with the last chart that I showed you, this pattern has continued. So I really didn’t need to update this chart because it’s more or less the same, which is basically from near the beginning of the year, though, you did get some, some past strength in February, March, but generally from April on you get pretty good soft median performance.

Now this is a percentage of performance versus the S&P 500. So how did it perform versus the S&P 500 with the 50% being it’s right in the middle of the group. So it was kind of a middle performer during most of the summer, then boom, every fall it pops. All right. So it’s percentage of months that IDBM closes higher. So it kind of, you know, you know, middle of the summer, you’re looking at 50 50, it might go up, it might go down. It tends to be a fairly benign group or ETF to own. But look what happens when you’re going into the fall, once again, you can see, like in the month of November 90% of that 10 years or the data you saw on an upswing on IWF. So my thoughts are given the look of the IBM chart itself with that perfect rectangular setup that it’s done before and a seasonal factor that has been pretty, pretty darn accurate as far as seasonality goes, seasonality doesn’t work all the time, but this, this has worked at least for the past few years.

To me, this is a good technical setup. This is a good seasonal setup. I’m looking quite seriously for our ValueTrend portfolios to buy into the sector through both possibly the IWM ETF. I haven’t made up my mind on that, but most certainly we have a list of small cap stocks that we are watching. So this is not a buy it today, they idea, but this is something that given the parameters that I’ve suggested offers a decent trading opportunity. And again, the thing about this kind of trading opportunity is with the rectangular looking pattern. All you have to do is understand that if it breaks out of the rectangle to the downside out of the rectangle, that it’s currently stuck in, if it breaks out of that to the downside, that’s when you get out. So it’s a mental stop-loss anybody that reads my work knows, I don’t believe in physical stop losses because the traders will take advantage of you and whip you out.

And then the stock will go right back up. But you can put in your brain that if support is at $210 and you put a mental stop that if it moves, say $5 below there, and it stays there for at least a few days, you get out and that’s your loss. So it’s a little, it’s a way of controlling your downside, having a discipline, and yet possibly realizing all the potential that this sector, if you want to call it not has displayed in previous years. I think it’s an exciting opportunity that that may actually break out this year. We’ll see, but it’s setting up perfectly. And I think it’s something that you ought to keep on your radar. I know I am.

Thanks for watching. And by the way, just final note, I want it to just bring it up to your attention that the new book, Smart money, Dumb money is out and here it is, and you can buy it in Amazon and indigo and Barnes and noble and all the usual bookstores. Everybody buys online these days, you can buy it in Kindle form. So the one thing you’ll never see as an audio book with my type of work, because if you go through it, it’s filled with charts, as you might imagine. So you can most certainly buy it in Kindle and you can certainly buy it online on all the major booksellers.

I think that if you read it, you might find some interesting notes on contrarian investing that you don’t already have a handle on because I explored some interesting stuff in the alternative data space. And I think that was probably the most exciting part of the book that I found when I was researching for it. So again, thanks for watching. And if you do buy the book, please give us a review on Amazon and or any of the others that you buy the book on, because that helps me bring the book to other investors attention to just like you.

Never miss another video!

Get Smart Money Dumb Money videos delivered directly to your inbox.

Recent Posts

Keith's on Demand Technical Analysis course is now available

Scroll to Top