Traders, Key an Eye on Small Caps

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It’s a busy week for earnings and economic news. But, don’t forget about one the year’s strongest areas in the market.

We’re talking about small-cap stocks, tracked by the iShares Russell 2000 ETF (IWM). Its 9 percent gain so far this year makes it the second-best major index behind the Nasdaq-100. IWM also hit a new all-time high in June — something the larger-cap S&P 500 and Dow Jones Industrial Average benchmarks haven’t done since January.

RadarScreen®with year-to-date index returns. Notice the right column shows larger-cap stocks are further from their respective 52-week highs

Investors usually associate small caps more with the domestic economy than the global economy. That’s shielded them from worries about tariffs and trade, unlike the kind of big companies populating the Dow and S&P.

It could also focus attention on the Commerce Department’s announcement of gross domestic product on Friday morning. Economists forecast growth near 4 percent, the strongest in almost four years. The following week brings key monthly payroll and manufacturing data. (Click here for Market Action’s trader-friendly calendar.)

Chart watchers may also notice a tightening range on IWM following its springtime rally. This isn’t a trade recommendation and everyone needs to do their own homework. But some traders may wonder if this isn’t a bullish triangle with the potential for a breakout to new highs as the economic reports trickle out.

iShares Russell 2000 ETF (IWM) showing new highs (crosses) and potential triangle.
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David Russell is VP of Content Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.