SMALL CAP STRENGTH

In yesterday’s Weekly report “That Was The Week That Was”, I stated:

“it is also worth considering that there are periods when the market’s momentum can cause a “shorts” stampede. This can be huge for the bulls, as a combination of short covering and investors returning from the sidelines can provide a powerful combination in keeping the momentum intact. ”

To expand on that thought, last week the markets continued to bully the shorts as they easily broke through some resistance levels. The market continues to ignore bad news, and many indexes are close to testing their January highs. Of importance the smallcaps have taken the lead as the Russell 2000 has already traded to new highs. Many stocks have been acting well and sectors such as consumer discretionary have been leading the charge. This is a bullish sign when leadership comes from riskier asset classes and suggests the consumer is back on track.

Below we have a chart of the iShares Russell 2000 Index (NYSE:IWM) ETF. The small cap stocks have been very strong, and IWM has bounced from the February lows to surge past the January top. IWM cleared an important level near $62 in February, and after resting for a week followed through with the breakout. The $65 level will be important to watch moving forward as a pullback to this level could bring in buyers that missed the initial move.

Will the rest of the market indexes follow them higher?

While the majority of the indexes remain in a trading range, the recent action has been bullish. The markets have been able to overcome some resistance levels fairly easily. The question that remains and that could prove to be an early warning sign has been the light volume. While some critics will minimize the importance of volume, it still does not impress if market participants are backing off from rising prices.

Will this week bring a test of very important levels or will it be a warning signal if sellers show up and overwhelm the light buying volume. The recent strong upward move in a very short period may well cauise a pause or pullback from these levels. Be patient and wait for the markets to prove themselves.