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Small Cap Stocks on the Verge of a Big Breakdown?

Thursday, October 27, 2016 8:25
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Small capInvestment advisor Dana Lyons points out today that the Russell 2000 index is on the verge of violating multiple trend lines of support, which could mean a major breakdown is in the works.

A main theme recently among both our posts and our quantitative risk analysis has been the battle between weakening market internals and resilient price averages. Despite deteriorating breadth and momentum, most of the major averages had been able to hold above the key levels that we’ve identified.

For example, just 9 days ago, we highlighted 2 Up trend lines on the chart of the Russell 2000 Small-Cap Index (RUT). These lines (e.g., the post-2009 and post-February Up trend lines), we suggested, were the key in determining whether the RUT would maintain its upward trajectory (above the lines), or see an expansion in potential downside. Recently, the RUT had been able (barely) to hold the top side of of the trendlines and maintain its path of least resistance to the upside. That path may have shifted today.

As these updated charts show, the RUT closed below the 2 key trend lines today – albeit by a fairly slim margin.

Wide Angle:




While the winds may have potentially shifted following today’s action, the overall message here is the same as it was 9 days ago. Thus, we will repeat what we stated in that post:

If the RUT should “Continue to hold above the trend lines, the bulls will remain in control and the intermediate-term rally in small-cap stocks can persist further. Should the level give way, however, the bears may have their chance to finally deliver a more serious blow.”

Absent a quick recovery of the broken trendlines, the bears would appear to have their chance now, especially given the elevated status of our broad market risk assessment. The question is will they finally follow through, or will the small stocks manage to narrowly hang on once again?

The iShares Russell 2000 Index ETF (NYSE:IWM) fell $0.84 (-0.70%) to $118.89 per share in Thursday morning trading. Year-to-date, the largest fund tied to the Russell 2000, which boasts more than $27 billion in assets, has gained 5.52% year-to-date.


This article is brought to you courtesy of Dana Lyons’ Tumblr.

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