Can The Massive Russell 2000 Rally Last? (IWM)

From Dana Lyons: U.S. small-cap stocks scored a new 52-week high by a wide margin yesterday; is it a sign of more gains to come, or exhaustion?

Much of the buzz in the equity world at the moment surrounds the small-cap space. After being essentially stuck in a trading range since last December, yesterday saw a dramatic jump in the Russell 2000 small-cap index (RUT) to a new 52-week high. In fact, with a gain of 1.92%, the RUT nearly experienced its 5th day ever closing 2% above its prior 52-week high.

As it stands, it is the 17th close ever for the RUT of at least 1.5% above its previous 52-week high. Here is a chart of the others, all occurring since 1999.

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So is this demonstrative breakout a sign of further gains to come? Or is it an exhaustive, blowoff type of move, sucking in the last folks to the small-cap party? Let’s look at the performance of the Russell 2000 following the prior such “blasts” to new 52-week highs.

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Well, I’m not sure that a blanket study of these 16 precedents does us a lot of good in determining the likelihood of a breakout vs. blowoff here. Median returns pretty alternated positive and negative from the 1-day period out to 2 months. Furthermore, even though median returns were positive for each period after 2 months, the percentage of winners was still barely above 50%, if at all. Therefore, despite the positive median returns in the longer-term, the likelihood of a winner versus loser over those time frames was pretty much a toss-up.

So is there anything to be gleaned from a study of prior “blasts”? Well, as you can see on the chart, there has been a subset of predominant winners and one of losers, as designated by the blue and red markers. As the chart states, the blue (breakout) group saw consistently positive returns out several months, while the red (blowoff) group had consistently poor returns with substantial drawdowns.

How did we separate the 2 groups? We identified one additional set of circumstances surrounding these precedents that may indeed delineate the winners from the losers.

In a premium post at The Lyons Share, we reveal the set of circumstances that has served as a consistent predictor of breakouts vs. blowoffs, i.e., winners vs. losers. We also look at conditions surrounding our current case to see which group it most closely identifies with – and, thus, the likelihood of this move in the small-caps continuing to rocket higher or running out of fuel.

 

The iShares Russell 2000 Index ETF (IWM) rose $0.08 (+0.05%) in premarket trading Friday. Year-to-date, IWM has gained 10.42%, versus a 13.03% rise in the benchmark S&P 500 index during the same period.

IWM currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 37 ETFs in the Small Cap Blend ETFs category.


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Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.

This article is brought to you courtesy of Dana Lyons, JLFMI and My401kPro.