Traders will get a week of quiet before the next Fed decision. You have to wonder if the market would care whether the Fed tacks on another quarter point at this stage. Nothing has hampered the momentum of the top names within the technology sector, and housing refuses to slow down.
Until Friday, the gap between QQQ and IWM performance has been widening for roughly three months without pause. Of course, one day does not end a trend, but at some point the risk versus reward in owning IWM rather than QQQ will tip in favor of the IWM.
The disproportionate moves between the two are no secret, but it becomes eye-opening when charted together. With so little news coming at us this week, things could be a bit dull, but that's when trends tend to do their best, in my experience.
That's especially the case with bullish trends because, as we all know, you never short a dull market. We're set up for a nice rally into the Fed decision mid-month barring anything out of the blue that catches investors off guard. Ironically, I think it will be something unforeseen -- something other than inflation or interest rates -- that finally hits the market, but I don't think it will come this week.
If we examine IWM closer, without the noise of the QQQ, it finally looks like it has the move needed to break out. The shorter-term 10-day exponential moving average (EMA) not only separated from the 21-day EMA, but it also crossed above the 50-day EMA for the first time since early March. It has been almost three months since we've seen this.
From here, IWM is on a path into the $188 to $190 level. We should encounter resistance as early as $186, but if we grind higher those traders who bought the 2023 IWM top in late January and February of this year likely will be looking to exit breakeven, close to it, or for a small profit.
Returning to the 2023 high will be a huge task as we still sit almost 10% below that level. As I've watched small companies and private companies struggle to raise capital, it is hard to imagine we see that kind of move in the second half of the year without a definitive pause on interest rates and some notion that monetary easing will come into play in the next six to 12 month. However, a near-term rally of 3%-5% feels plausible.