Small Cap Stocks Lead Market

Stocks opened modestly higher and have extended early gains into midday Tuesday. After moving to fresh 2016 highs Monday, the S&P 500 is up another 8.31 points to 2117.72.

With no meaningful economic data released today, and not much on the immediate horizon, Treasury bonds are building on last week’s gains and the yield on the benchmark ten-year has eased back to 1.7%.

Crude oil bubbled towards $50 per barrel and gold lost $3 to $1244.50.

On Wall Street, nine of ten market sectors are higher, led by Energy (XLE), Telecomm (IYZ), and Industrials (XLI). Healthcare (XLV) is seeing relative weakness.

CBOE Volatility Index (.VIX) is down .05 to 13.60 and probing the lower end of the multi-month range. Overall options volumes are running about the normal levels, with 3.4 million calls and 2.8 million puts traded across the exchanges through the first two hours Tuesday. Projected volume for the day, of 14.2 million contracts, matches the one-month daily average.

A hefty GE January 25 – 30 put spread was bought 75000X Tuesday morning and, as a result, GE Jan 25 and 30 puts are the most active options so far today. iShares Emerging Markets (EEM) Jun 35 calls, Bank of America (BAC) Jan 13 puts, and iShares Small Cap Fund (IWM) Jul 111 puts are seeing notable flow as well.

Speaking of the iShares Small Cap Fund, the performance of the ETF over the past few weeks has been noteworthy. The chart below shows shares correcting in the first two weeks of May, but then staging an aggressive rally since May 19th and gaining 8.3% since that time. As the rally unfolded, the 50-day and 200-day moving averages have crossed over to form a bullish technical signal known as a “golden cross”.

See Tradespoon’s Stock Forecast on ISHARES TR-RUSSELL 2000 ETF (IWM)

Tradespoon’s Stock Forecast on ISHARES TR-RUSSELL 2000 ETF (IWM)

Looking forward, the performance of the small caps is worth noting because it is a sign of positive market breadth, a trend that was certainly absent during much of 2015. Like its large cap counterparts, IWM is now moving to 2016 highs. The next test will be around the $119 per share level, which coincides with December 2015 highs. On the downside, look for support around the April highs of $115, as well the aforementioned 50 and 200-day moving averages.

As for the S&P 500, the index is attempting to take out previous resistance at 2015 today. Resistance also likely at 2020 and 2028. Support likely at 2010, 2100, and 2085 and be on alert for a potential midweek reversal midday Wednesday after the strong run higher and two days of gains Monday and Tuesday.