It’s no secret to most that small cap stocks have been the under-performing market cap sector of US equities in 2014. In fact, the IWM (iShares Russell Small Cap ETF) is down 5.69% over the last 9 months, which compares to the SPY which is up 6.70%. Obviously this a very large difference, particularly given the fact both ETF’s are representing different baskets of the US stocks!
At Dorsey Wright Money Management we tend to try and keep things as simple as possible when analyzing the markets. Our systematic approach to relative strength based investing is done by analyzing all of the markets across the globe and looking to gain exposure to the ones with the strongest rankings. Obviously this strategy has been helpful in minimizing exposure to the small caps sector in recent months in many of our models. However, there will be a time at some point where money will funnel back into the small caps. Our trend following approach is typically not associated with trying to “find the bottom” of the market, but more so geared to gain exposure later in the move and catch the “bulk “of the trend instead of the top and/or bottom.
In this blog post we take a look at current technical set ups on the traditional point & figure charts of both the iShares Russell Small Cap ETF (IWM) and PowerShares DWA SmallCap Momentum Portfolio (DWAS).
iShares Russell 2000 Index Fund: (Point & Figure)
In analyzing the global markets, we view each point and figure chart as a simple concept of supply & demand. Regardless of the many reasons people believe markets move, supply & demand are ultimately what determine asset prices around globe. Let’s take a quick look at the traditional point & figure chart of the IWM to see what the supply & demand factors are saying regarding the current levels of small cap stocks.
Just recently (10/1), a double bottom pattern break was confirmed which has a measured move price target of 98.00. However, in taking a closer glance at the chart below we can also see prices are resting on a triple bottom support level which would only be broken should a move down through 106.00 occur. Let’s think about that in terms of supply & demand. On the two previous attempts to break this level the market found support as willing buyers decided to step back in and overwhelm the sellers. It will be interesting to see if these same buyers once again come back in and help give the market a firm bid as they did previously! A move below the 106.00 level may be a sign supply is overwhelming demand this time and the small cap bulls are in retreat mode. The potential measured move price target should the triple bottom break be confirmed is 94.00.
PowerShares DWA Small Cap ETF (DWAS): (Point & Figure)
Let’s take our analysis a step further and see if the PowerShares DWA Small Cap Momentum Portfolio (DWAS) has a similar technical structure at the moment. Again, as we stated above, we are just using traditional point and figure charts to determine if there are any areas where we might expect the small cap sector to find some under-lying demand. These areas of demand aren’t necessarily buy signals (we use our relative strength matrix for those decisions), but they may help us spot when pockets of relative strength start to develop within the small cap sector.
The DWAS is also approaching an area where demand has shown up in the past. A quadruple bottom pattern is setting up should price re-test the 34.50 level in the near future. This level has held 3 times in the past and would only confirmed with a move through the 34.00 level.
Dorsey Wright is the index provider for DWAS
This note serves as a brief update regarding the current technical structure of the small cap sector within US Equities. In a sector that has trailed most of its peers throughout 2014, we can see that both the IWM and DWAS products are near levels where demand overwhelmed supply in recent attempts. As we stated above, at Dorsey Wright Money Management we don’t necessarily view these levels as buy signals, but they give us a general idea of where RS rankings for such a beaten down sector may begin to improve.
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