Higher Highs Coming?
The market continued its run higher yesterday and technology and small caps were the clear leaders again; a bullish sign for the market. The Russell 2000 broke through 620-625 price resistance on Wednesday and closed above 625 yesterday making small-cap investors happy indeed. If the index can hold 625 today, it is likely setting up for a move that will take it even higher. For reference, recall that Russell topped out at 847 in May of 2007 and bottomed on May 9, 2009 at 343.
I wrote in Tuesday's issue of Small Cap Investor Daily that, "we should expect the {Russell 2000 small-cap} index to trade in a near-term range between 660 and 550. Within that range, I'm targeting two key price levels: an upward move through 620 would likely lead to a retest of 660, while a break of 580 should tell investors to look out below. Should the index move thorough 620, then 660, I'm looking for a big move higher to 725. Conversely, a drop to 580, then 550, increases the possibility of a bigger drop to 525."
So far, it looks like the index is heading higher, although buying volume has been light this week. I suspect this means many investors who were short particular stocks are covering their positions.
I like to follow these broad trends in the Russell 2000 small-cap index to maintain a sense of perspective and to help me pick entry and exit points on particular stocks. If you like this type of analysis, you should check out Trademaster Daily Stock Alerts. This service is all about technical analysis and is great compliment to Small Cap Investor Daily and Small Cap Investor Pro. Click here to take a look and see if it's something you're interested in.
***I really like to follow the Russell 2000 index since it covers so many stocks. But there is another barometer for small-caps besides the Russell that is good for investors to follow as well. This is the S&P SmallCap 600 Index and it is maintained by the S&P Index Committee. By covering 600 companies with market caps between $200 million and $2 billion, it also does a good job measuring the performance of small companies. In fact, stocks in the S&P 600 index have an average market cap of around $670 million, whereas companies in the Russell 2000 have an average market cap of around $950 million.
Another major difference between the Russell 2000 and the S&P SmallCap 600 are the requirements for inclusion in the respective indices. The S&P 600 is more stringent, requiring that companies have at least four consecutive quarters of positive GAAP earnings, public float greater then 50%, and reasonable liquidity and stock price. These guidelines are intended to exclude lower quality names. Because of the stringent requirements it only represents 3% of the overall market.
Investors can purchase an investment that tracks either the Russell 2000 or the S&P 600 by buying shares in exchange traded funds that track the respective index. The iShares Russell 2000 ETF (NYSE: IWM) is designed to track the performance of the Russell 2000 small-cap index, whereas the iShares S&P SmallCap 600ETF (NYSE: IJR) tracks the S&P SmallCap 600.
***In future issues of Small Cap Investor Daily I'll be discussing the performance of these two ETFs when talking about broad small-cap stock performance. This way those of you who like to invest in small-caps through ETFs will receive analysis of investable products.
Also, next week we'll be taking a closer look at individual stocks again. What are your favorites for 2010? Send me the tickers and I'll review in a future issue. My address is: editorial@smallcapinvestor.com
