From Taki Tsaklanos: Following a massive 20% rally in the Russell 2000 in the month of November, the venerable small cap index looks primed for a major pullback before running to new highs.
We wrote recently in our Markets Outlook for 2017 that the small cap index, Russell 2000, typically considered a ‘risk asset’, looked poised for a bullish cycle. That conclusion was based on intermarket dynamics, i.e. fear peaked in July of this year.
Now there is a high probability of a short term retracement. As indicated in Transportation index bumping into resistance, the TRAN index is also facing a risk of retracing. Note that the Russell 2000 contains quite a bit of small cap transportations companies, so both indexes are somewhat related currently.
The depth of the retracement of the Russell 2000 will provide clues about its new bull market. Ideally, the index will retrace to its breakout level, at 1200 points, a higher low compared to the October lows, before it starts climbing higher. If that scenario plays out, the small cap index Russell 2000 will be a strong buy.
For now, investors are probably better off waiting on the inevitable pullback first before leaping back in.
The iShares Russell 2000 Index ETF (NYSE:IWM) rose $0.37 (+0.28%) to $132.70 per share in premarket trading Tuesday. Year-to-date, the largest fund tied to the small cap index has gained 17.5%.
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