The iShares Russell 2000 (NYSEArca: IWM) has paused to digest its recent gains after the small-cap ETF broke out to record price levels last week. Smaller stocks have led the market higher since the November bottom.
For example, IWM is up 14.6% since its Nov. 16 intraday low, while SPDR S&P 500 (NYSEArca: SPY) has gained 8.3%.
“Since mid-2011, the Russell 2000 has traded in a rather choppy fashion which has helped define its current wedge-shaped trading range,” according to chartoftheday.com. “More recently, the Russell 2000 has started the new year in a positive fashion by both breaking above resistance … and making a new record high.”
When small-cap ETFs are outperforming it’s generally a good sign for the overall market because investors are taking on more risk in the more-volatile segment.
“Small-cap stocks tend to be more volatile due to narrower economic moats and a greater sensitivity to macroeconomic risks, but with this greater volatility comes a higher beta and the expectation for higher returns. Small-cap stocks have earned a return premium about 2.0% over large-cap stocks since 1926,” investment research firm Morningstar writes in a profile of IWM.
Full disclosure: Tom Lydon’s clients own IWM and SPY.
The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.