Small-Cap Stocks Show Stealth Buying Pattern

Investors may have expected Friday to end with good news, and in some ways it did, but not in the way they were hoping for. Indexes closed nearly flat for the day after gapping higher at the open. Some investors sold shares at the start as markets drifted lower in the early hours of the session, but by midday, stock prices had rebounded off their lows. 

Small-cap stocks closed the week leaving an interesting pattern suggesting that some investors are quietly snapping up this asset class. Taking a look at the chart of the ETF that tracks the Russell 2000 small-cap index, the iShares Russell 2000 ETF (IWM), it appears that the relative strength index (RSI) indicator is showing a bullish divergence from the price action. When such a signal occurs, it implies that conditions might be right for the asset to trend higher in price (see chart below).

If the small-cap stocks in the Russell 2000 index do represent a good buy, then shrewd investors might want to go looking for the best stocks in that group to consider. One very simple method for finding good stocks to consider for investing is to look for relative strength. This means stocks that have already moved higher in price at a pace faster than their benchmark (in this case, faster than IWM). 

The four most heavily represented stocks in the index tracked by IWM are as follows: Novocure Limted (NVCR), Haemonetics Corporation (HAE), Science Application International Corporation (SAIC), and Portland General Electric Company (POR). These stocks have also outperformed their index over the past three months and would likely continue to rise if buyers began finding small-cap stocks more attractive (see chart below).

The chart pattern shown below is unique to Haemonetics, but investors have a way of displaying their collective reaction to a company’s news and performance. In this chart, Haemonetics shares have twice shown the tendency to surge after good news reported in company earnings. However, the share price has begun to languish in the past two quarters. Three months ago, this pullback represented an excellent entry point for investors, as shares surged higher over the following two months. 

It may be expecting lightning to strike twice – however, it seems a good bet that, if the Russell 2000 index moves higher in the days to come, Haemonetics shares will likely rise to a greater degree. 

U.S. stock indexes opened higher but slumped in early trading, finding support and ultimately closing only slightly lower than the previous day’s close. Small-cap stocks seem to be showing a bullish divergence with technical indicators. The leading stocks in the Russell 2000 might be set for good performance if investors decide to favor higher-risk assets in the near future.

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