Did the Fed Just Save Small Caps?
By Ben Levisohn
If you're bullish on stocks, it had to worry you that the Russell 2000 refused to join the recent rally. That might have changed following the Fed's unexpectedly hawkish statement today.
- Tim Boyle/Bloomberg
The Institutional View's Andrew Addison and Rhino Trading Partners' Michael Block, to name two, both described the failure of small caps to sustain their uptrend as possible roadblocks towards a sustained rally, with Block noting that the Russell 2000 was "coiling for something…a breakdown." Without the Russell joining the rally, he implied, stocks would have trouble moving higher.
In fact, while the SPDR S&P 500 ETF (SPY) has returned 7.1% during the past month, the iShares Russell 2000 (IWM) has returned just 2.1%.
Today, however, small caps are flying after the Fed left the door open for a December rate hike. The Russell 2000 has gained 2% to 1,168.21 at 3:06 today, more than double the S&P 500′s 0.8% rise to 2081.59.
Why the sudden outperformance? UBS strategist Rebecca Cheong notes that the Russell 2000 outperforms when the dollar is strong, and boy is the dollar strong. The ICE Dollar Index has gained 0.8%. A "stronger dollar is expected to hurt large cap more than small cap, hence small cap outperformance," Cheong says.
Her recommendation: Buy the iShares Russell 2000 (IWM) and short the SPDR S&P 500 ETF (SPY).
Posted by: sarah_oz@yahoo.com
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