After scuffling to start 2017, some small-cap exchange traded funds have recently gained momentum. For example, over the past month, the iShares Core S&P Small-Cap ETF (NYSEArca: IJR) and the iShares Russell 2000 ETF (NYSEArca: IWM) are each up about 6% and residing near new highs.
Still, some market observers are leery of further upside for smaller stocks. IWM is the biggest ETF tracking the widely followed Russell 2000 Index. Following Election Day, investors flocked to IWM, IJR and rival small-cap ETFs as markets priced in President Donald Trump’s “America First” mantra that would help domestically-oriented companies led the next leg in economic growth.
Late August through mid-September is, on a historical basis, a good time own small-caps, but with that period ending, IWM, IJR and rival ETFs could succumb to profit-taking.
“This certainly was the situation this year as the Russell 2000 index surged 4.8% from August 24 through yesterday’s close compared to a 2.8% gain by the Russell 1000 during the same time period. The Russell 2000 is still outperforming today, but there are signs that this trend could be coming to an end,” according to Almanac Trader.
Another ETF to monitor if small-caps retreat is the the iShares S&P Small-Cap 600 Growth ETF (NASDAQ: IJT), which has managed only a modest year-to-date return. The $4.2 billion IJT tracks the S&P SmallCap 600 Growth Index. Value stocks typically trade at cheaper prices relative to fundamental measures of value, such as earnings and the book value of assets. In contrast, growth stocks tend to run at higher valuations since investors expect the rapid growth in those company measures.
Small-caps are also focused on the domestic economy and have less direct exposure to global geopolitical uncertainty and currency risks, as opposed to large-cap companies that have an international footprint, which may be affected by overseas risks and a strengthening U.S. dollar.
“The first sign is the historical seasonal pattern highlighted in the above chart is on the verge of heading lower once again indicating that small-cap underperformance will return. Other headwinds to the continuation of the small-cap rally are Stochastic, relative strength and MACD indicators that are all in overbought territory (in the following chart). Russell 2000 is also sitting right around projected monthly resistance (red-dashed line). Stretched technical indicators at the end of a favorable seasonal period suggest that the bulk of the Russell 2000’s latest advance is most likely done,” notes Almanac Trader.
Tom Lydon’s clients own shares of IWM.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.