Favor Going Long IWM, The Small Cap ETF


We believe that further rally in the small cap stock market and IWM is likely.

The cyclical picture in the US has generally been healthy. Thanks to reasonable activity figures, firm readings from earnings, and ongoing healing in the private sector, we think that the key decision for investors this year is likely to involve backing the improvement. The improving business cycle in the US has always been the biggest driver of our more positive view for small cap stocks. Our economic and market indicators are positioned to support an extension of the price increase that could last through a few months and take US risk assets on a decent growth path. As a result, we are still comfortable about our current bullish view on the Russell 2000.


Elements in the US's latest economic data remain consistent with robust growth in small cap companies. The ISM numbers were notably strong again, in line with our robust growth forecasts. The continued rise in new orders relative to inventories in the manufacturing surveys also pointed to further strength ahead. On the other hand, improving conditions in the job market in the US will translate into strong growth in wages, which tends to be associated with strong economic growth and rising corporate profits. Furthermore, with domestic demand being robust, we expect continued expansion of industrial activity in the US going forward.


The current macro profile means that beyond the next quarter or two, the small cap market may face a steadily improving picture, with a broadening private-sector recovery in the US. In addition, the real return on cash and short-dated credit instruments is now relatively low, especially in relation to other risk alternatives. For long-term investors, this environment has created a number of opportunities in US small cap stocks in our view. Therefore, our findings here are bullish for the Russell 2000 and IWM, the ETF that tracks the index. While it is always a good idea to have some cash in reserve in case some potentially good risk asset purchase candidates appear, because this is often the most dynamic part of the cycle, we think that liquidity should be maintained at a relatively low level.