Small Caps in Russell 2000 Break Out to Fresh Highs

Small-cap stocks in the Russell 2000 have outperformed the S&P 500, Dow Jones Industrial Average and technology stocks in the NASDAQ Composite over the past three months. While many larger companies have been struggling to cope with a potential trade war, small caps conduct most of their business in the United States and aren't affected by these risks. At the same time, these companies are well positioned to benefit from the lower corporate tax rate.

The iShares Russell 2000 ETF (IWM) rose more than 1% to new all-time highs following its breakout from an ascending triangle pattern on Wednesday. According to iShares, the fund's average P/E ratio clocked in at 20.91x, which is still lower than the S&P 500's 24.78x P/E ratio. Many investors may be drawn to the lower earnings multiples for these companies compared with the lofty multiples seen at larger companies in the S&P 500 and DJIA. (See also: IWM vs. VTWO: Comparing U.S. Small-Cap ETFs.)

From a technical standpoint, the fund broke out from trendline resistance at around $160 to fresh all-time highs of $160.92 on Wednesday. The relative strength index (RSI) is rapidly approaching overbought levels at 67.54, but the moving average convergence divergence (MACD) remains in a robust uptrend following its bullish crossover earlier this month. These indicators suggest that there could be some profit taking, but the long-term trend is bullish.

Traders should watch for some consolidation above $160.00 and then a move toward R2 resistance at around $164.16 over the coming sessions. Based on the ascending triangle chart pattern, the fund could see a long-term move higher toward about $180.00 before meeting significant resistance. If the stock breaks below trendline support at $160.00, traders could see a move lower to retest the 50-day moving average at $155.14. (For more, see: Why Stocks May Stage a Summer Rally.)

Chart courtesy of StockCharts.com. The author holds no position in the stock(s) mentioned except through passively managed index funds.