Welcome to the party, small-caps. On Tuesday, the iShares Russell 2000 ETF (IWM) finally put in the type of divergence day I've been waiting to see. On Monday, I talked about the huge outperformance we had seen from the Invesco QQQ Trust (QQQ) and the breakout of IWM.
The market handed traders a nice pullback to the 5-day exponential moving average (EMA) Monday with no break of last Friday's low as an entry point. Tuesday turned into a strong trend day and showcased a second day of outperformance compared to the QQQ, plus a continued breakout.
IWM tagged $185, a dollar short of my initial resistance target, quickly. We're set up for that test of $188 to $190. There's no guarantee IWM will get there, but if you were a buyer on Monday or early on Tuesday, it should be easy to set a trailing stop around the 10-day EMA and not risk much downside. Conservative traders may opt for the 5-day EMA, especially if it equates to a breakeven stop or even a tiny profit.
Again, there has been a massive underperformance, and we look overdue for some rotation. I wouldn't fight the short-term momentum in small-caps. The week is likely to be quiet on the news front regarding stocks. IWM has a fantastic opportunity to grab the attention of traders.
This week has not been devoid of news, though. The Securities and Exchange Commission will be filing suit against anything crypto, crypto-related, crypto-adjacent, or organizations that even thought about crypto in their sleep.
I may have exaggerated the last one, but SEC chief Gary Gensler is on a crypto crusade this week. Binance, Coinbase Global COIN and almost a dozen coins have fallen into the crosshairs.
Clear regulation around cryptocurrency is long overdue. The SEC has danced around the issue for too long. Are they securities? Are they commodities? Are they new animals that need their own specific set of rules?
I lean toward the latter of those questions. While there is a security nature to most fungible tokens, and I think their rules would rhyme well with securities, other nuances in cryptocurrency and tokens may need specific language that we don't find in securities laws or commodity regulation.
Unfortunately, I expect things will get messy before they get transparent. Could it spill into equities? If things get ugly in Crypto-land, it absolutely could. Is it the outlier that smacks equities that no one saw coming because they were focused on inflation and interest rates? Maybe. I'm not ready to say it is, but I'll keep an eye on that news and the subsequent price action just in case.
