Thursday, August 19, 2021

#SmallCap Stocks Review $IWM

Russell 2k Review
Those that view the message of the market on a daily basis are likely confused by trading noise. While trading noise contributes to the long-term trends, it does not define them. Human behavior tries to explain trading noise as a meaningful trend. This confuses the majority which, in turn, contributes to their role as bag holders of trend transitions.

Russell 2000 or small cap stocks' overall trend, revealed by trends of price, leverage, and time, are defined and discussed in The Matrix for subscribers.

Good morning Eric,

I just wanted to get your thoughts on the Russell 2K, massive energy builds in both DI and DI2, but the weekly needs to reset. Just curious your thoughts as we near the bottom of the range that it has traded in since January.



Subscriber Comments

We should all be watching the Russell 2000.

Our thoughts on the Russell 2000 can be summed up in one word - underperformance. In the old days, before I began studying markets, investors/traders used to track the NYSE advance/decline line as a means of tracking participation, breadth, and the underlying health of the domestic economy. John Murphy, an older technician that was known for observing rather than opining, often wrote that trends become unstable (trouble begins) when the generals (a few large cap names) rather than soldiers (broader) market lead rallies or declines.

The Russell 2000's chronic underperformance defines a concentration stock rally, a move influenced by a few large, mega cap names rather than the market. Concentration of rallies often happens when international capital flows seeks return of capital rather than return on capital. It does that when the risk of implosion in the periphery economies (within the global economy) is rising. Capital seeks the safety of the core economy when this happens. It's the main reason why the US dollar in on the verge of a primary trend flip from down to up.

The underperformance of the Russell 2000 is warning of trouble ahead for the domestic economy. That's significant since 70%+ of US employment originates from small and micro cap companies.

In terms of the Evolution of the Trade, the Russell 2000 core position remains long. It's been long for 12 months and 43%. The secondary (weekly) trend is showing price cycle extension as the time cycle matures. The daily impulse is down, so the risk is that cause building extends to the weekly trend.
Watch energy during cause building (consolidation) within the composite trend. DI & DI2 are already very high. This is favorable to the bulls, but we must wait for a Reset. If a Reset takes place without correcting the extension in the weekly trend, it will be ignored.

If the dollar continues to rally, and breakout, the game will have changed. Expect the Russell 2000 to continue to underperform. There are no guarantees the stock market will hold either as DY1-DY4 cycles define an exceptionally risky backdrop that few recognizes today, but will panic about when it finally matters (read any Dividend Cycle Review).

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