Watch the Russell 2000 (IWM) For Future Clues of Market Trend

After a very weak May, the stock market rebounded in June both in the U.S. and overseas markets. The rally gained strength as investors focused on the expectations of a potential rate cut at the late-July FOMC meeting. This ignited the Dow and the S&P 500 to a new all-time high on 6/20. All eleven S&P sectors are positive this month. Materials (XLB) are the best, while U.S. Real Estate (IYR) is the weakest. Market breadth (the NYSE Advance-Decline Line) has confirmed the Dow and S&P 500 new record all-time highs, which would normally suggest that the final high most likely has yet to occur. However, the coming months may be somewhat challenging for this year’s rally. The big question is if the rally will be sustainable and continue higher, or will the major trend soon turn down?

Although the Dow Industrials and the S&P 500 index have made new all-time highs, there are several sectors of the market that are very far away from new all-time highs, raising questions about the overall health of the market. The following sectors have not made new all-time highs and are concerning; Biotechnology (XBI), Retail (XRT), Transports (IYT), Financials (XLF), Regional Banks (KRE), Mid Cap 400 (MDY) and the Russell 2000 (IWM). At the time of this writing, the Russell 2000 is over 12% below its August 2018 high. This is disturbing, and bears watching closely to see if the IWM will gain strength and go toward the old high or if the IWM will take out the May low and move even lower.

Where do we go from here?

Figure: Weekly Russell 2000 (IWM) Price (Top) and 12-26-9 MACD (Bottom)

The top portion of the Russell 2000 (IWM) chart shows the weekly (intermediate term) Russell 2000 (IWM)[1] and its active price channel (purple line). There is also a 50-week moving average (green line) that is commonly used to define the present trend.

The Russell 2000 (IWM) rose from November 2017 and was working its way higher until 1/22/18 at 160.62 (orange circle). A decline began with the IWM going below the mid channel and penetrating the 50-week Moving Average (blue circle) for only one week, trading as low as 142.50 on 2/5/18. Then the IWM moved sideways staying above the 50-week MA before rising to the upper channel, peaking first at 170.20 and then 173.39 (red circles). Selling accelerated sharply after breaking below the 50-week Moving Average (green circle) and middle channel falling to a low of 123.81 (orange circle) on 12/24/18.

At first the IWM showed good strength rallying off of the December low. However, the IWM failed to sustain any kind of upside thrust after barely penetrating the 50-week moving average on February 22 (blue circle). Ultimately, IWM peaked at 161.11 on May 6 (1.9% above its level of Feb. 22), well under its August 2018 high at 173.39. IWM has pulled back 5.6% since May 6. In contrast, the S&P 500 SPDR (SPY) gained 5.4% from Feb. 22 to May 6 and went on to make a new high on June 20.

In June, the IWM stalled under the 50-week Moving Average and has turned down again. In addition, the IWM has failed to get above the downtrend line and has not confirmed the S&P 500 and the Nasdaq in making a new all-time high. It’s very important that the IWM stays above the May 27 low at 145.32 for a positive outlook going forward and a buying opportunity to develop.

If the IWM turns up and closes above the 50-week MA at 154. 88 this would be bullish. The first clue a bullish turn could occur is if the IWM begins to outperform the S&P 500 on consecutive days. The second clue would be the IWM breaking the weekly downtrend closing above 156.50.   If the IWM has a weekly close above 154.88, (the 50-week MA) this would imply the December low has been successfully tested and further gains are likely. On the other hand, a close below 145.32 would turn me more cautious.

The lower portion of the chart is MACD, a technical indicator that measures momentum. MACD is on a sell, falling and below 0. If MACD turns up and generates a buy, then this would form a favorable double bottom. For now, MACD remains on a sell suggesting caution.

Summing Up:

The Russell 2000 (IWM) has struggled in recent weeks and has stalled near the 50-week moving average. Monitor if the IWM begins to outperform the S&P 500 on consecutive days as a clue more strength will occur. A weekly close above 154.88 (the 50-week MA) would imply a further rally toward the May high of 161.11 and possibly the August 2018 high of 173.39. On the other hand, if the IWM falls below 145.32 this would suggest the stock market may be vulnerable to a more serious decline in the near term.

I would love to hear from you. Please call me at 516-829-6444 or email at bgortler@signalert.com to share your thoughts or ask me any questions you might have.

[1] The iShares Russell 2000 Index ETF (IWM) is made up of companies with a market capitalization of between $300 million and $2 billion. The portfolio top 5 sector holdings as of 6/24/19 are Financials 23.18%, Industrials 14.26%, Consumer Cyclicals 13.49%, Technology 13.26% and Health Care 12.72%, (Source: //www.etf.com/IWM).

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******Article published in Systems and Forecasts by Bonnie Gortler June 27, 2019

Disclaimer: Although the information is made with a sincere effort for accuracy, it is not guaranteed that the information provided is a statement of fact. Nor can we guarantee the results of following any of the recommendations made herein. Readers are encouraged to meet with their own advisors to consider the suitability of investments for their own particular situations and for determination of their own risk levels. Past performance does not guarantee any future results.

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Bonnie S. Gortler

Bonnie Gortler, Consultant, Coach, and Author specializing in Wealth and Well-Being, is a successful stock market expert who has been instrumental in managing multi-million-dollar client portfolios within a top-rated investment firm during her over 35-year corporate career. As the author of “Journey to Wealth,” Bonnie has made it her mission to share the importance of risk management and how to enjoy real financial well-being by applying the technical and mental sides of investing. Bonnie has an M.B.A. and is a certified life coach. It is through her love of coaching, consulting, blogging, and social media that she creates change in the lives of many and inspires people from around the world. Bonnie is fully committed to your personal growth and development as she shares her winning spirit and powerful techniques with you. Visit BonnieGortler.com to gain tips and insights about investing, personal development, and inspiration through her articles on Wealth and Well-Being.
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