Mind the Gap…Again: Small Caps (IWM) Breaking Down Below It’s February Base

by Dan March 2, 2012 11:47 am • Commentary
Update March 2nd, 2012: On Tuesday we highlighted the fact that the IWM, the etf that tracks the Russell 2000 Index of small cap stocks was breaking below it’s 20 day moving average for the first time since Dec 19th.  I am keeping a close eye on this relationship as IWM has spent the better part of the week below this short term momentum reading, with the last 2 closes below it and most likely today.   Small cap weakness in my opinion, will precede that of it’s large cap brethren as most investors view large better capitalized companies as safer holdings.
YTD IWM chart from Bloomberg LP
Additionally, the chart below shows that the IWM is breaking below a very interesting 1 month support level at $81, a level that is has not been below since early this month.
1 Month IWM chart from Bloomberg LP
I bring this up as we I feel the rally is losing steam as evidenced by declining momentum, declining volume and anemic new high readings with most major indicies at 52 week highs.  Yesterday’s reading of the Bloomberg New High Composite Index of only 336 with the SPX at 1370ish is disgusting, especially when u compare it where it was in early May 2011 when the index saw readings of over 1000 new highs with the SPX at the same levels.  THE RALLY IS GETTING NARROWER AND NARROWER PEOPLE.
1 Yr SPX vs Bloomberg Composite New HIgh Index from Bloomberg LP
Original Post Feb 27t, 2012: Mind the Gap: IWM Breaking Its 20 Day Moving Average, First Time Since Dec 19th
  • We want to highlight a chart we are tracking fairly closely…..IWM breaking through its 20 day moving average, and if it closes below it, would be the first time since Dec 19th, 2011. The price action is also being confirmed by declining momentum as evidenced by its RSI rolling over.  
  • What we find possibly significant about this chart is that it could set up as an important price break for trend followers, and could signal a catalyst for equity weakness to follow.  Ok that is a lot of “coulds” but at this point we are spending lots of time looking for chinks in the armor of the is seemingly unstoppable…..and come on, the small cap etf is up 23% since the Dec 19th “head-fake close”.
  • we’re leaning on the side of a convincing break given the continued weakness in market breadth (as highlighted here) and the continued strength of bonds, the big money indicator…….BUT want to see this close below 20 day mva on large volume to convince us.

1 YR IWM chart breaking 20 day moving average from Bloomberg LP