
KEY
TAKEAWAYS
- Financials characterize one of many high sector weights within the IWM, and banks have kicked off earnings season with renewed power.
- A resurgence in biotech shares, one of many largest industries represented within the IWM, might present an upside catalyst.
- US Greenback power might adversely influence mega cap earnings, and will present a tailwind for small cap outperformance.
There have been rumblings of “the return of small caps” for a lot of moons, however small cap management has nonetheless not materialized as we kick off the brand new yr. At the moment we’ll share three charts to look at, moreover the clearly necessary chart of the Russell 2000 ETF (IWM), to find out when a brand new management section for small caps is imminent.
The chart of IWM seems to be in a impartial state, much like what we’re observing within the different main fairness indexes. A protracted-term trendline utilizing the October 2023 and August 2024 lows has been violated, however this week we noticed a bounce proper again above this degree. IWM has bounced off the 200-day transferring common, in addition to the 38.2% retracement of the 2024 bull market, but it surely nonetheless stays beneath its 50-day transferring common.
Financials Are One of many Prime Sectors in Small Caps
Whereas the S&P 500 is dominated by the expertise sector, presently comprising about 32% of the index primarily based on market capitalization, small cap indexes are likely to have a extra value-tilted sector profile. Financials are the second largest sector weight after industrials, and a lift this week from earnings wins signifies maybe a brand new management function for this value-oriented sector.
We will see {that a} related trendline for the Monetary Choose Sector SPDR Fund (XLF) was examined final week and held earlier than this week’s bounce larger. We will additionally observe a bullish momentum divergence over the past two months, with decrease lows in worth matched with larger lows within the RSI. Lastly, the every day PPO indicator lately generated a bullish crossover, indicating the pattern has now reversed larger.
A Resurgence in Biotechs Might Enhance the Small Cap Index
Whereas financials have rotated larger this week, the iShares Nasdaq Biotechnology ETF (IBB) stays in a major downtrend. Nevertheless, with IBB bouncing off help round $131, this might be a setup for a bullish worth rotation.
Whereas IBB has been pounding out decrease highs since final November, the worth is now not making decrease lows. A bounce off this current help degree, adopted by a profitable breakout above transferring common resistance, might positively flip this chart from a continual underperformer to a extra compelling house. And since biotechs are one of many largest business bets within the Russell 2000, renewed power for IBB might more than likely translate to upside actions for IWM.
Within the Finish, It is All In regards to the US Greenback
Whereas these earlier two charts characterize giant weights within the Russell 2000, our last chart represents extra of a macro tailwind for small caps. Mega cap multinational firms, similar to the highest weights within the S&P 500 and Nasdaq 100, generate a big share of their revenues outdoors the US. So after they go to trade their non-US revenues again into US {Dollars}, the stronger $USD chart would imply these non-US revenues are a lot much less invaluable in greenback phrases.
Small cap firms are likely to generate most of their revenues within the US. Due to this fact, small cap shares wouldn’t be confronted with that forex headwind that might have dramatic results on mega cap earnings in 2025.
We will see a reasonably constant major uptrend within the US Greenback since a significant low in September 2024. So long as this chart continues to make larger highs and better lows, the stronger US Greenback might have increasingly more of a destructive influence on the most important US firms. As small caps are pretty immune from this potential headwind, a continued uptrend within the US Greenback would counsel small caps might positively outperform going ahead.
On the finish of the day, the chart of IWM will probably be crucial one to look at to gauge a possible management function for small caps. Essentially the most bullish sign we might observe can be a breakout for the small indexes! Hopefully these three charts can be utilized along side an intensive technical analysis of IWM to find out whether or not small caps can lastly tackle a management function within the fairness house.
RR#6,
Dave
PS- Able to improve your funding course of? Try my free behavioral investing course!
David Keller, CMT
President and Chief Strategist
Sierra Alpha Analysis LLC
Disclaimer: This weblog is for academic functions solely and shouldn’t be construed as monetary recommendation. The concepts and techniques ought to by no means be used with out first assessing your individual private and monetary state of affairs, or with out consulting a monetary skilled.
The creator doesn’t have a place in talked about securities on the time of publication. Any opinions expressed herein are solely these of the creator and don’t in any means characterize the views or opinions of some other individual or entity.

David Keller, CMT is President and Chief Strategist at Sierra Alpha Analysis LLC, the place he helps lively buyers make higher selections utilizing behavioral finance and technical evaluation. Dave is a CNBC Contributor, and he recaps market exercise and interviews main consultants on his “Market Misbehavior” YouTube channel. A former President of the CMT Affiliation, Dave can also be a member of the Technical Securities Analysts Affiliation San Francisco and the Worldwide Federation of Technical Analysts. He was previously a Managing Director of Analysis at Constancy Investments, the place he managed the famend Constancy Chart Room, and Chief Market Strategist at StockCharts, persevering with the work of legendary technical analyst John Murphy.
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