Friday, February 02, 2007

IWM Breakout

One of the indices that I follow every day is the IWM which, as you know, is the ETF of the RUT or the "Rusty 2K". Since November this index has been in an ever decreasing, range bound, sideways move (otherwise known as a triangle) and it appears that on Monday it might have broken out.

This is interesting because during January the small cap growth (IWO) went up 3.5 while the small cap value (IWN) went down 2.3 according to David over at the Shark Report.

These two indices (growth and value) each contain 1000 stocks and each makes up half of the IWM. Here is a picture that shows how these three ETFs operate together.

Notice how the Red Line (Growth) turned up in early January (15 trading days ago) and the Blue Line (Value) didn't swing up until later in the month (about 7 trading days ago) and that the Gold Line (RUT) didn't make its turn until both of its component indices were turned. I've annotated the chart with the same dates and lines as above except to note that there was a false turn event on 27 Dec with no follow-through.

So when you look at the IWM you are seeing both halves of a whole. This is interesting because you can then go look at both of the halves individually and actually make sense of the entire set. And you will know that the only way you are going to get any progress or regress in the index is for both halves to cooperate.

So when the IWM is going up or going down both the value and growth components are going up or going down together and it probably doesn't make a figs worth of difference which you are in. On the other hand - at the turns it pays to watch the two component indices because sometimes (not always - see 28 Nov) they move independently. And if you can catch the move early in one you are generally better off for it.

While three data points is hardly a trend it does constitute a breakout and perhaps the small cap set is again ready to roll.

And a memory trick - M - N - O where "M" stands for "Many" and "O" stands for GrOwth and the other one is just - the other one.