Small-cap stocks and the relevant exchange traded funds confounded in investors confounded investors last year as the iShares Russell 2000 ETF (NYSEArca: IWM) gained just 5% compared to a 13.5% jump for the S&P 500.
IWM has not been much to squawk about this year, trading modestly lower, but the ETF’s recent lethargy could be more consolidation than an ode to disappointment. And that consolidation could be ready to give way to a significant move to the upside for the benchmark small-cap ETF.
“The first chart shows the weekly candlesticks in a sideways range over the past 16 months. We have now tested the upper end of this range four times since it first peaked in March of last year. The more times that a level is tested, the higher the likelihood that it breaks. I believe an upside breakout is coming any minute and we want to be buyers of that breakout. The catalyst, to me, is the failed breakdown in October below support from last February and May near 1080,” notes Eagle Bay Capital Founder J.C. Parets.
Chart Courtesy: J.C. Parets, Eagle Bay Capital
Fundamentally, small-caps offer some allure as resilient strong dollar plays. Most smaller companies are not exposed to foreign exchange risks and the strengthening dollar. According to Bank of America Merrill Lynch, 81.3% of revenue from the Russell 2000 Index is generated within the U.S., whereas 64.3% of revenue for S&P 500 companies come from the states. [Small-Cap ETF Optimism]