The Long Small-Caps Vs. Short Tech Trade Gets Crowded

 | Jul 05, 2017 | 6:00 AM EDT
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Stock quotes in this article:

IWM

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QQQ

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FB

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amzn

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nflx

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googl

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XLK

Oftentimes, I am simply too early for my own good. I can envision a move in the market or a stock, but typically we have one more move the other way first. In trading, "early" is a euphemism for "wrong". Especially when I wait out that "last rally" or "last decline", only to be glad I've gotten back to "even".

Then there are those times that my timing is spot on. The times where I see something in the market that is either not being seen by others, or perhaps ignored. Then, after the trade begins to work, others finally see it or are willing to acknowledge it and act upon it. They no longer want to ignore it, they want to trade it. At that point, my contrarian nature wants to immediately take the other side of that trade because now too many have moved to my camp.

The latter scenario is where I find myself right now, when it comes to the long iShares Russell 2000 ETF (IWM) /Short PowerShares QQQ ETF (QQQ) ratio I have been on for over a month now. In early June, it was that higher low (blue line) that attracted me to this trade. It was spot on for the first week and most ignored it or just thought it was a countertrend rally within a downtrend.

We did pull back and rally again (in the ratio). In the last week, the trade has once again picked up quite a bit of steam as Nasdaq has lost 2% and the small caps have gained almost 1%.

On Monday, I began to see so many calls for lower "FANG" stocks - Action Alerts PLUS holding Facebook (FB) , Trifecta Stocks name Amazon (AMZN) , Netflix (NFLX) and Google parent Alphabet (GOOGL) -- or lower semis or lower (XLK) (the ETF to be long technology stocks) while we should be long Transports, Energy, Financials, or even -- gasp! -- small-caps. Welcome to the trade that has been working for the last month!

So, of course, my contrarian nature wants to say the trade is over, it's done. Too many see it, so now it can't work. Heck, aren't they allowed to be right for a while?

The chart -- with new lines drawn now -- shows the ratio is once again heading into resistance, so yes, I can envision a pullback in the ratio later in the week, but until I see a lower high, akin to the blue circles on the chart, I am not yet ready to concede the trade is done.

Take a look at the chart of the PHLX Semiconductor SOX, which has been the weakest link in the tech trade of late. There's a lot on the chart, so bear with me. There is the uptrend line, which depending on how thick your pencil is comes in just around 1010. There is a gap (black arrow) which is just about getting filled now. Those are short-term support zones that should offer a bounce.

But see that red arrow? That's the rally we saw off the previous short-term support zone. I suspect before tech's correction is done this uptrend line breaks and we see some real negativity on the semis and tech. And maybe that's when we see a lower high in the IWM/QQQ ratio. Maybe.

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