IWC Review: Wait To Take A New Position

Summary

• The macroeconomic backdrop is positive.
• The IWC has performed well over multiple time frames.
• It is currently consolidating; wait until the index breaks through the upper 150s before taking a new position.

When looking at ETFs that track broad averages, I first look at the underlying economic backdrop of the macro-economy or specific economic sector. I then look at the index's charts to determine its overall trend.

Investment thesis:

The IWC is currently consolidating gains. Wait until the index breaks through the upper 150s before taking a new position.

In general, the macroeconomic backdrop is positive. According to the latest BEA GDP report, the economy grew 4.3% in 4Q20 (see here and here). The latest report from the Atlanta Fed is predicting 1Q21 GDP of 6%: The same chart also shows that the Blue Chip range of forecasts is between ~2.75% and 7%. The following table shows growth projections from the NY Fed:Although the pace for 1Q21 GDP growth has slowed, it is still a respectable 4.7%.

Zacks is predicting a solid earnings environment:

• Total 2021 Q1 earnings are currently expected to be up +19.9% from the same period last year on +5.6% higher revenues, with a combination of easy comparisons and strong gains in a number of sectors giving us the growth rebound.
• Estimates for the current and coming quarters have steadily moved up, a trend that has been in place since last Summer. We expect this favorable revisions trend to accelerate in the coming months as we start looking past the pandemic.
• The positive revisions trend is broad-based, with Q1 estimates for 10 of the 16 Zacks sectors going up over the last three months and estimates for the Autos and Energy sectors more than doubling over that time period.

FactSet is predicting similar strength:

Earnings Growth: For Q1 2021, the estimated earnings growth rate for the S&P 500 is 23.3%. If 23.3% is the actual growth rate for the quarter, it will mark the highest year-over-year earnings growth rate reported by the index since Q3 2018 (26.1%).

Finally, the main coincidental indicators are all moving higher after dropping last Spring when the economy shutdown: The above chart converts the data to a base 100, with the end of the previous recession (6/1/09) being 100. All have rebounded from the Spring's lows in varying degrees.

The IWC, "seeks to track the investment results of the Russell Microcap Index (the “Underlying Index”), which measures the performance of the microcap sector of the U.S. equity market, as defined by FTSE Russell (the “Index Provider” or “Russell”)." It has performed well during the last year. The following table - which uses data from Finviz.com - shows how the IWC has performed when compared to the SPY, QQQ, OEF, IJH, IWM, and DIA:

	Week	1-Month	3-Months	6-Months	1-Years
IWC	2nd	Last	First	First	First

Click to enlarge

With the exception of the 1-month time frame, the IWC has been in the top three.

Let's next check on the charts, starting with one using the weekly time frame: IWC Weekly from Stockcharts.com

The index cratered last Spring, collapsing 46% from January's high of 99.97 to March's low of 54.22. But the index rallied into the Summer, eventually rising to previous highs. The index gapped higher in November when Pfizer announced its successful vaccine trials. The index rallied an additional 76% from 90.62 in October of last year to March's high of 159.38. However, the index recently broke trend and started to consolidate sideways.

IWC daily

The daily chart puts the data into a starker relief. There was a Spring rally, a summer consolidation, followed by a Fall rally. There was a very clear trend break in March when prices started to move sideways. This occurred on very high volume, which may indicate a "selling climax."

IWC 6-Month

The 6-month chart shows the consolidation in more detail. Prices have been trending sideways since early February. They are using the mid-140s for support and upper 150s for resistance.

What is likely happening is traders are simply taking profits from the very strong run that started in November of last year. With the macroeconomic backdrop so positive, it's difficult to see a major sell-off. If you're looking to take a position, however, wait until the index clears resistance in the upper 150s.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.