- The macroeconomic backdrop is positive.
- IWM has enjoyed a very strong year-long rally.
- Hold off on a new position until prices break through the mid-$230s.
Whenever I look at an ETF that tracks a major index, I first look at the macroeconomic backdrop to determine if the economy is expanding or contracting. The former means the index is likely to rise; the latter means the index will probably contract. Then I look at various charts of the index to determine if the timing is right to take a new position.
Investment thesis: the IWM continues to consolidate gains. Don't take new positions until the index breaks through resistance.
Let's take a look at the macroeconomic backdrop by using the Conference Board's leading and coincidental indicators. This methodology is largely based on research done by Arthur Burns and Geoffrey Moore of the Federal Reserve.
Here is the latest data from the Conference Board:
The top panel shows the leading index M/M results for the last seven months. This data has increased strongly in all but one month. The coincidental data has increased in four of the last seven months. It slowed at the end of last year due to increased measures to slow the virus, which have since been lifted.The above panel looks at the components of the leading index. The top panel shows the exact number while the bottom panel shows how much each contributed to the top-line number. In the last seven months, there were only 11 negative readings out of a possible 60, which shows how strong the underlying data has been (this is from the lower panel).
Here's a chart of the data from the same report:
The LEI has regained most of its losses from the pandemic.
Economic conclusion: the US is at the beginning of what is likely to be a strong expansion. Congress recently passed a strong stimulus bill and is considering others. The Fed is dovish.
The IWM is up a very strong 74.7% during the last year - a very strong performance figure.
The IWM has had a very strong run since last Spring. It has risen in two stages. The first latest from 3/20 until 8/20. The IWM was up 68% during this time. The index consolidated last fall and started a new rally in 11/20. This recently ended. Since last Spring, the IWM is up nearly 150%. For the duration of the rally, volume rose.IWM 1-year
The yearly chart shows that the IWM consolidated in a modestly upward trending channel last summer. In early November, the index gapped higher on Pfizer's vaccine news. This trend lasted until March when the index started to trend sideways.
The index has trended sideways during the last three months, trending between the lower $200s and mid-$230s. It's also possible that the index has formed a complex head and shoulders pattern.
The IWM has had an incredible run since last Spring. But it's possible that after a nearly 160% year-long rally, most of the gains are already baked into prices. If you've taken a position in the index, hold onto it for now. But don't take a new position until prices break through the mid-$230s.
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