Willingness to increase exposure to risk over the past several weeks has brought the attention of many to companies trading with relatively small market capitalization. The group of companies known as the small caps are those that typically trade with a market value between $300 million and $2 billion and are typically targeted by investors seeking above-average growth. In the article below, we’ll analyze the state of the small cap stocks from around the globe to try and identify if now is the time to buy. (For more on this topic, see: What's a Small Cap Stock?)

With the rise in popularity of exchange traded funds, it is now possible for retail investors to gain targeted access to basket of similar companies from around the world. One popular fund that is used to track the global small cap market is the SPDR S&P International Small Cap ETF (GWX). As you can see from the chart below, the wide trading range during most of 2015 has made this fund a favorite amongst many active traders. This chart is a great example of the type of resistance that is often found at the 200-day moving average (red line). Notice how this level has prevented a move higher in the past (red arrows) and how it reversed its role and became support once the price was able to move above (blue arrows). Based on historic price action, we’d expect the price to bounce off of this resistance level and move lower. Bullish traders will likely want to remain on the sidelines and only enter a long position once the price is able to move above $29.25. (For related reading, see: ETF Anaysis: iShares Russell 2000 Index)

Chart of the GWX ETF facing the resistance of its 200-day moving average.

Global Small Caps Ex-U.S.

The first assumption of many active traders is that small cap stocks outside the United States must be faring worse given the recent talk of global market uncertainty. Taking a look at the chart of the Vanguard FTSE All-World Ex US Small Cap ETF (VSS), you’ll notice that it looks extremely similar to the GWX fund shown above. In the case of VSS, it is interesting to note that the horizontal trendline along with the 200-day moving average have both acted as key levels for traders when setting up their trades. As was discussed above, the level has behaved as many traders would expect by reversing its role when the price moves beyond the identified pivot points. From a risk management perspective, we’d expect active traders to hold a bearish outlook on the VSS fund and many will likely look to protect their short positions by placing stop-loss orders above $98.16. 

The VSS facing the resistance of a key long-term trendline.

Small Caps In Brazil

Narrowing in on certain countries such as Brazil, it becomes apparent that small cap stocks are trading within significant downtrends given their above-average-risk profile. Based on the chart of the Market Vectors Brazil Small Cap ETF (BRF), you’ll see that the 50-day moving average has been a barrier to a move higher for quite some time (red arrows) and the close proximity is creating a lucrative risk/reward ratio for those looking for bearish trading opportunities. For more, see: Is Now The Right Time To Buy Brazilian Stocks?)   

Brazil small-cap ETF trading within a clearly identified downtrend. The price is testing the resistance of its 50-day moving average near $11.89.

The Bottom Line

With the broad market move higher over the past several weeks, many traders have started to turn their attention to asset classes such as small cap stocks. In the article above, we took a look at the chart of several key ETFs that track small cap stocks in different regions and each of the charts suggest that there are significant barriers to a move higher. At this point, bullish traders may want to look at more stable asset classes or perhaps remain on the sidelines until the prices close back above key levels such as the 200-day moving averages. (For more, see: Which ETF To Choose: Small Cap Vs. Large Cap)

 

 

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