Will the Small Caps Take The Lead?

The S&P 500 has set a new all-time high, barely inching above the tight trading range of the past month. And the S&P 500 is the star index. While the NASDAQ Composite is close to a 13-year high (2000 remains its glory year) and the Dow Jones Industrial Average is close but has lost energy, the Russell 2000, the index of smaller cap stocks, is still just dreaming of being on the new-highs list.

There have been recent articles about the smaller cap stocks catching up, taking over the lead. I immediately ask “Do they have any track record of doing so this time of year?”

Let's pick a date about eight weeks from now. That will take us through the rest of vacation season and up to the September option expiration week. If you were considering trading a move in the Russell 2000 or some of its top components over the near future, and were considering  various option strategies, the September expiration time frame would be the time period you would most likely focus on.

How has the Russell 2000 performed over the next 8 weeks? Has it any track record of ‘taking the lead' when the other indexes are off on vacation?

I'll use IWM, the iShares Russell 2000 Index Fund ETF, for the analysis. Over the next 8 weeks, IWM has averaged a 0.1% loss. While it has gained in 10 out of its 14 years, the 2001 and 2011 losses counteract the small average gain from those 10 years.

Sometimes the best way to picture the overall performance of a stock or index is to simulate what would have happened if we had traded it. Say we tried a long position in IWM (i.e., bought the ETF), 8 weeks before September option expiration each ear and held it until the expiration date of the options (the 3rd Friday of each September).

We would have had 10 gains, that is true. But we would have lost $18.50 on average on each trade. Even if we drop off those two large losing years, the positive years didn't produce many gains to get excited about.

For an option trade, or even a stock trade lasting 8 weeks, I would like to see at least a 5% or more gain in the underlying stock. IWM produced such gains in only 4 of those 14 years, although 2 more years came close. In short, there is not much track record for the small caps showing strength this time of year. This means that in the past there hasn't been good reasons for the institutions to take risks this time of year. This may merely be ‘The Hamptons' effect, where many of the top risk-takers are vacationing or at least hesitant to commit new funds this time of year.

For the small caps to take over the lead this year, the current round of earnings releases would have to impress everyone by exceeding expectations. So far, that doesn't seem to be the case.

Of course, there's much more you need to know and many more stocks you can capitalize upon each and every day.  To find out more, please click on the following link: www.markettamer.com/seasonal

By Gregg Harris, MarketTamer Chief Technical Strategist

Copyright (C) 2014 Stock & Options Training LLC

Unless indicated otherwise, at the time of this writing, the author has no positions in any of the above-mentioned securities.

Gregg Harris is the Chief Technical Strategist at MarketTamer.com with extensive experience in the financial sector.

Gregg started out as an Engineer and brings a rigorous thinking to his financial research. Gregg's passion for finance resulted in the creation of a real-time quote system and his work has been featured nationally in publications, such as the Investment Guide magazine.

As an avid researcher, Gregg concentrates on leveraging what institutional and big money players are doing to move the market and create seasonal trend patterns. Using custom research tools, Gregg identifies stocks that are optimal for stock and options traders to exploit these trends and find the tailwinds that can propel stocks to levels that are hidden to the average trader.

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