Out of small cap stocks? Maybe, but don’t expect to make “easy money,” says chart watcher

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Small-cap stocks appear to have staged a much-sought upward breakthrough, with the Russell 2000 joining the major benchmarks in record territory on Tuesday for the first time since March. But an observer of the charts worries the move may attract too much attention.

“Ignoring everything else, small caps hitting new all-time highs is a good thing… The problem, however, is that too many other eyes can also be on this chart and the breakout,” wrote technical analyst Andrew Adams. in a Wednesday note for the Jump strategy.

The Russell 2000 RUT,
+ 0.91%,
an index that tracks the 2,000 smallest stocks in the offshore Russell 3000 RUA,
-0.02%,
was up 1.2% on Wednesday, a day after claiming its first record close since March 15. The move appeared to take the index out of a trading range that has prevailed over the past eight months.

Adams highlighted the chart below for the iShares Russell 2000 ETF IWM Tracking Index,
+ 0.93%.

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Small caps, which had jumped in late 2020 and early 2021 amid optimism about the reopening of the US and global economy, subsequently followed the benchmarks of large caps which have hit a series of records in recent weeks. .

The Russell is up 21.1% year-to-date, compared to a 23.1% gain for the S&P SPX,
-0.10%.
The S&P 500, the Dow Jones Industrial Average DJIA,
-0.40%
and Nasdaq Composite COMP,
+ 0.11%
each finished at a third straight record on Tuesday.

Adams said he suspected one of two scenarios that would complicate the move for small caps:

[T]this could take the form of a false breakout where IWM must first retreat before trying to exit later for real. Or on the other hand, we might wake up one morning with much higher small cap levels forcing traders and investors to decide if they want to pay and buy or wait and see if a drop occurs. A “gap and go” move can be very powerful, so I’ll be on the lookout for something like these two options.

Either scenario is more likely than a boring breakout that produces a slow and steady uptrend, he said. This is especially the case with large cap averages pushing against “short term extremes”, which could prevent them from keeping pace with small caps, potentially fueling the “false breakout” scenario.

“The market is seldom a money maker so easily, so anytime something seems too obvious something could happen to disrupt the ‘cleanliness’ of the model,” warned Adams, who said. ‘he was thinking of small caps. will likely move higher and provide another leg upside down.


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