IWM: Small Cap... trade idea

Investment Analysis Clubs Liquid Lounge
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I have added to my existing positions on 1/11, did some put selling and couple of covered call, hoping the stock goes down and I can keep the call, that didn’t go as planned. Now, I am thinking of doing some leaps and buying outright shares. Any interest rate cut will significantly help the index to move to $255 immediately and much higher overtime.

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If you see from 2009, over 10 years the index gained 360%. Especially considering the underperformance compared to SP500, last 2 years, I think there is a chance IWM outshoots beyond $255.

Starting Date 1-Mar-09
Ending Date 8/31/2018
Start Value 42
End Value 173.00
# of years 9.00
AGGR 17.03%
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The above is technical, for the fundamental leaning folks…

  • Most companies in R2K has floating rate debt, so they benefit from rate cut
  • 40% of R2K companies are unprofitable, so any rate cut, will help them to get to profit
  • PE is 12 (Yeap)
  • Price to BV is discount to SPY by 45%
  • If you think large cap, mega-tech had rallied hard, a catchup by small cap, or rotation will propel this.

Of course, you can go and find the “hidden gem” or the individual names which will certainly outperform the index. For simpleton folks like me, just buy the right index and ride it :slight_smile: :slight_smile:

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Here is a view that suggests may be caution is required in short-term. One has to be nimble to recognize a long-term opportunity may still have short-term bumps and being aware and nimble helps you to get a better cost basis. Of course, you can just sit tight not let short-term shake you out of long-term positions and can do great.

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With the price above $212, the stock is technically in a strong position to rally towards $235.

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I will post detailed thoughts on this… but this week move is almost 6.1%, even more impressive is it is 6 std dev move. The weekly close above $212 is also important. Now, is the time to get bold in this name.

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Here are two option trades I have placed today.

Bought Sep 240, and Sold Sep 245 for $0.83.
Bought Aug 240, and sold Aug 245 for $0.45

The Aug expiration is bit speculative. I expect IWM to continue to move up and Sep spread to work out.

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The Russell 2000 closed 4.4 standard deviations above its 50-day moving average.

No other major US index (Dow since 1900, S&P 500 since 1928, and Nasdaq since 1971) has ever closed at that much of an extreme.

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I think the expected rate cut is a big tailwind for the small cap and even it it matches the Oct 2023 move, that is 27%, we still have at least another 15% move up and that move happened in 2 months, hence my Sep call spread.

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The below is the chart from BofA chrtist, Stephen Suttmeier. Paraphrasing his notes…

  • 200 DMA is an important support, then lows from April, February and January offer additional support at 191.34 to 187.52.
  • The first resistance is at at 204.74-206.99, along with the 100- and 50-day MAs near 205-208.
  • Friday’s downside gap and late July low from 211 to 215-215.28 offer additional resistance."

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After today’s move, assuming it holds, $IWM has cleared most of the resistance and should test the recent high around $225~$228 area. As the rate cuts roll in, $IWM should rally.

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While I am bullish on $IWM and have very high allocation, so far the move is disappointing. Frankly $IWM is an anchor on my performance. Still hopeful… but

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$IWM touched all time high and closed bit lower at $242.44… Still hoping we could have an year-end rally.

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