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rafael-zorabedian

Patience! Small Cap Value Could Be Opportune on Pullbacks

June 8, 2021, 9:54 AM Rafael Zorabedian , Stock Trading Strategist

If you have been following along, you know about the Russell 2000 Reconstitution. Is there a way to make it work for you with a value theme?

Before we dig into opportunities on pullbacks, here’s a brief reminder about yesterday’s recap of the various ETFs we’re following and the good calls we’ve had on them.


Buying on Pullbacks

As this US equity bull market marches on, it is a good practice to keep a pulse on the broader indices in the short-term, to take a current measure of a market. While reviewing many different ETFs, it is apparent that many of the charts look the same at this moment.

If buying, I prefer to buy on pullbacks. Who doesn’t? Many traders like to trade on momentum, and that is also a proper strategy. For me, it is the pullbacks in a bull market that seem to have the most favorable risk/reward propositions, so taking a measure of the broader indices regularly can be beneficial.

Figure 1 - $SPX S&P 500 Index January 22, 2021 - June 7, 2021 Daily Candles Source stockcharts.com

As we can see, the $SPX is near the top end of its short-term range, with the key levels to know being 4232.60 being its all-time closing high (so far) on May 7. 2021.

Given the current macroeconomic theme, including higher inflation, weaker dollar overall, government spending, corporate labor expense reductions (think working at home), and more, I do expect the overall market to continue its march higher. However, when we are in a range, I don’t find much benefit to getting long near the very top end of a range for several reasons.

  1. What if the top of the range holds? Then, I could have used more patience , and gotten a better entry level.
  2. What if the market breaks out of the top of the range and then fails? Patience would have been good here too.
  3. What if the market breaks out of the top of the range and continues marching higher?! Then we may have missed a short-term opportunity. However, markets like to come back and test the old highs of ranges. This allows more time to discover more information and to potentially get even better entry points. Patience can go a long way.

So, at this moment, I would be looking at the 50-day moving average. Keep that on your radar, folks! It has been an excellent indicator in the S&P 500 for many attempts. You can read more about this in the May 12th publication.

Figure 2 - $SPX S&P 500 Index June 18, 2020 - June 7, 2021 Daily Candles Source stockcharts.com

Given that we are at the top of the recent range, I like to analyze some what-if scenarios. What if we do get a pullback? That would be the best scenario, in my opinion. If and when a pullback occurs, there may be several trades already in place. That can be working well for a trader to ride out a garden variety pullback while making a shopping list for new opportunities. So, what if we get a pullback, to say the 50-day moving average?

The small-cap value space has been a solid place to be in 2021. The ETFs in this space focus on smaller market capitalization stocks that seek value instead of growth. While "small cap value" may sound counterintuitive, there have been some ETFs with exceptional performance in this area during 2021.

With patience being the key theme today, where could we focus attention, if and when we get a meaningful pullback? Let’s dig into an ETF in the space that has delivered a YTD return exceeding 45% at the time of this writing.

Figure 3 - RZV Invesco S&P SmallCap 600 Pure Value ETF January 4, 2021 - June 7, 2021, Daily Candles Source stockcharts.com

Above, we see a daily chart of RZV Invesco Exchange-Traded Fund Trust - S&P SmallCap 600 Pure Value ETF. You can get the full ETF details here.

The performance in 2021 has been outstanding, with a YTD return of 48.14% at the time of writing.

We are approaching the key $100 psychological level, and the daily RSIs are reading at 66, approaching potentially overbought short-term territory. So, I want a game plan, if and when we do get a pullback.

The first thing I like is the 50-day MA, which currently sits at $91.32. The 50-day MA is 7.13% below current levels at this time. Taking note of the level gives us a starting point; to put this one on the radar, in case we do get a broader market pullback.

Given the theme in 2021 with the rotation to value, combined with small-cap performance, and the Russell reconstitution currently underway, RZV makes sense. But not right here. Let’s be patient and let the market come to us.

To sum up the current viewpoint and opinion:

I have BUY opinions for:

  • iShares Trust Russell 2000 ETF (IWM) for an index reconstitution trade. At this time, I would be looking to be long and then exiting upon the actual reconstituted index going into place on June 28, 2021. Buy the rumor, sell the fact type of trade. Buy Pullbacks. For equity-bearish folks, see the IWM/SPY spread idea in the May 27th publication. Always use a stop loss level that caters to your individual risk tolerance.
  • Update: 06/08: The IWM tacked on another 1.34% in yesterday’s session. Opinion: stay long.
  • Defiance Quantum ETF (QTUM) between $44.00 - $47.25. Update 05/27: I will now raise my buy idea zone upwards to $47.60. Look for pullbacks for entries. Update 06/08: QTUM closed at $48.97 in yesterday’s session. Always use a stop loss level that caters to your individual risk tolerance.
  • Amplify Transformational Data Sharing ETF (BLOK) between $37.68 - $37.91. BLOK has a history of high volatility, so proceed with caution. Always use a stop loss level that caters to your individual risk tolerance. Update 06/08: Patience.
  • Invesco MSCI Sustainable Future ETF (ERTH) between $67.76 - $70.82. Always use a stop loss level that caters to your individual risk tolerance. Update 06/08: ERTH closed at $75.31 yesterday. Hold longs.
  • RZV Invesco Exchange-Traded Fund Trust - S&P SmallCap 600 Pure Value ETF at 50-day moving average (currently $91.32). Patience and wait for the pullback.

I have SELL opinions for:

  • Invesco DB Commodity Index Tracking Fund (DBC) $18.50 - $18.75. Target 17.50 (old highs) to $17.75. Always use a stop loss level that caters to your individual risk tolerance. Use caution if you are trying this trade, knowing that the DXY could capitulate. See the May 19th publication for more details. Update 06/08: DBC closed at 19.11 yesterday. As mentioned yesterday, if short, look to exit this trade regardless of price, before Thursday morning's CPI data release.

I have a HOLD opinion for:

  • First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID). GRID has traded through our idea range of between $86.91 and $88.17. I do not encourage chasing it, if not already long, in my opinion. Update 06/08: GRID closed at $91.44 yesterday. Opinion: hold longs. Daily RSI at 62.
  • Always use a stop loss level that caters to your individual risk tolerance.

Thanks for reading today’s publication. Your readership is valued and appreciated. Have a great day!

Thank you,


Rafael Zorabedian
Stock Trading Strategist

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