Are Small Caps The Next Big Thing?

From Keith Harwood, OptionHotline.com

As we review the market bounce from last week, I am curious what will lead the market back into bull territory.  Tech is a bit concerning if interest rates continue to rise, but financials often perform well in a rising interest rate environment.

Given this, we could look at XLF, the financials ETF for a hint:

Now, of course, exclusively picking financials can be a bit risky.  Let’s review the sector breakdown of IWM from the iShares site:

Financials are heavily weighted, but we also see strong exposure to industrials, consumer discretionary, and energy, which have all been strong performers.

So why shouldn’t IWM lead the way going forward?  Let’s take a look at the IWM chart here, as it’s getting to some interesting levels:

Financials are heavily weighted, but we also see strong exposure to industrials, consumer discretionary, and energy, which have all been strong performers.

So why shouldn’t IWM lead the way going forward?  Let’s take a look at the IWM chart here, as it’s getting to some interesting levels:

First, the 10-Day Moving Average crossed over the 20-Day Moving Average yesterday, showing some increased momentum.  Second, the ETF had a period of consolidation before the rally, setting up a clear support level that could act as a stop-loss.

But is the upside enough?  With resistance at the 100-Day Moving Average, this seems like a good long-term grind play, rather than an explosive quick trade.  That’s not the worst thing in the world to have, and if the small cap sectors continue to show strength, I think we may finally see some rotation back to small caps after tech has been our leader for the last few years.  That’s where things could get explosive if the general investment community starts to get on board with a new market leader.

It seems to me that investing in small caps and using an intelligent options strategy, like a call debit spread, can set up for a great return profile on something that is showing good probability of success.  Those are trades that I think everyone can appreciate.

So, please go to https://optionhotline.com to review how I traditionally apply technical signals and probability analysis to my options trades.  As always, if you have any questions, never hesitate to reach out.

Keith Harwood

[email protected]

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