A Positive Trend Developing In The iShares Russell 2000 Index ETF (IWM)
Stocks concluded the holiday-shortened week on a firmly positive note last Friday, as the major indices scored solid gains across the board. The S&P 500, Dow Jones, and NASDAQ each climbed 1.0% and closed at their intraday highs. Total volume in both exchanges was approximately 37% higher than the previous day’s levels; however, the volume comparison is not accurate because the prior session closed three hours early.
Last Friday’s rally pushed each of the major indices back above their respective 50-day moving averages. The reclamation of this key, intermediate-term trend indicator is significant because it points to the bulls regaining the upper hand in the stock market. Big-money players such as banks, mutual funds, hedge funds, and other institutions are also more confident buying stocks when the S&P, Dow, and NASDAQ are all above their 50-day moving averages.
One positive element of recent market action has been the relative strength in small-cap stocks. Unlike the rest of the main stock market indexes, each of which are still trading well below resistance of their May 2013 highs, the small-cap Russell 2000 index has already rallied back to test its recent highs. The index also set a fresh ALL-TIME closing high last Friday. This is shown on the daily chart of iShares Russell 2000 index ETF ($IWM) below:
Keeping an eye on the performance of small-cap stocks during and after market corrections is important because institutional money flow into the small-cap arena indicates an increasing demand for risk among investors. When the stock market is being led by small-cap stocks, new leadership develops in leading stocks, which tends to pull the entire broad market along with it. This is much more positive than having leadership in blue-chip (Dow) stocks, which sometimes indicates a flight to safety.
Throughout the first half of 2013, one of the strongest international ETFs was iShares Japan Index ($EWJ), which cruised 26% higher from the beginning of the year to its May 21 peak. In late May, $EWJ finally entered into a correction that saw the ETF retrace 13% from its May peak down to its June 6 low. However, $EWJ has recovered nicely since then, and is back above both its 20 and 50-day moving averages.
If EWJ rallies above last Friday’s high, it will start to fill a large gap that was formed when the ETF was in correction mode. If that happens, we could easily see $EWJ cruise back to its 52-week high very rapidly. Take a look: