A big jump by previously left-behind small-cap shares has bulls looking for a broader, healthier U.S. stock-market rally, but one closely followed technical analyst is urging investors to proceed with caution.
The small-capitalization Russell 2000
RUT,
rallied around 7% over the last four trading days through Wednesday, the largest such move since last November, noted Jonathan Krinsky, chief market technician at BTIG.
“Our view remains that we had a big run in the megacaps that led to a rotation/chase into the laggard stocks (i.e., small-caps), but that has likely
run its course,” Krinsky said, with the iShares Russell 2000 ETF
IWM,
running into heavy resistance in the 186-187 area.
The S&P 500 index
SPX,
was up 0.5% on Thursday, trading near 4,290 and not far below the 4,292.44 level, which a close above would mark the large-capitalization benchmark’s exit from a bear market. The S&P 500 is up nearly 12% so far in 2023, with the gains heavily concentrated in megacap, technology-related stocks. The narrowness of the rally has stoked concerns about its durability.
Consumer-discretionary and tech shares were again leading gains on Thursday, lifting the indexes while the majority of individual stocks were on the decline.
See: Dow, Nasdaq and S&P 500 are rising but most stocks are falling
The Russell 2000 was down 0.4% on Thursday, but remained up 2.7% for the week to date compared with a 0.1% rise for the S&P 500 and a 0.3% pullback by the tech-heavy Nasdaq Composite
COMP,
Tech-related gains have sent the Nasdaq up more than 26% so far in 2023, while the more cyclically oriented Dow Jones Industrial Average
DJIA,
has gained just 2.1%.
Krinsky expressed concern over a jump in purchases of call options on the IWM ETF. Calls are options contracts that give the holder the right, but not the obligation, to buy the underlying security at a set price by a certain time. They’re often used by speculators to make bullish bets. Puts are options contracts confer the right, but not the obligation, to sell.
BTIG
The last two days saw over 2 million call options trade, he noted (see chart above), the second-largest two-day volume in data going back to 2000 since Dec. 22-23, 2009. Both Wednesday and 2009 were ex-dividend dates for IWM, which may have influenced the figures somewhat, he said, but warned that put/call ratios in favor of calls continue to suggest “complacency.”
The third-highest two-day total when it comes to call buying was Nov. 3-4, 2021, which came just two days before the Russell 2000’s all-time high, he noted.
He also flagged that the trading range for the index on Wednesday was entirely above the upper Bollinger band. Bollinger bands are a technical tool that places a band 2 standard deviations above and below a simple moving average. A move above the top band can be a signal that an asset is overbought.
BTIG
Krinsky noted that incidents in which the Russell 2000 spends an entire session above the upper band are rare, occurring just 15 times since 1990. The forward returns have been mixed, he said, with some “very bullish outcomes” in January 1999 and June 2003, but more recent bearish outcomes, including in January 2020 and February 2021.
This post was originally published on Market Watch
