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Are Small Caps Ready for a Crash?

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Demand for stocks is very high and being "overbought" isn't necessarily a bad thing.

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Small caps have had an amazing run the past month or so. Is it finally time for a big correction?

Looking at a weekly chart, the iShares Russell 2000 Index ETF (NYSEARCA:IWM) just closed two consecutive weeks above its upper Bollinger Band. The last time it did that was in September, right before an 11% drop. It also came within pennies of doing it back in January, and that did very little to slow down the bull.

Still, what does this mean?



Going back to 2003, this has happened just five previous times. Over the next week, you can expect some selling, but going out longer term, it doesn't look too bad. In fact, going out six months, the returns are outright impressive. Even one to three months later things aren't too bad, given how extended things are when this happens.



Here are the previous five times and the returns after a signal.



For fun, my firm looked at when there were three straight weeks above the top Bollinger Band -- and not surprisingly, it is extremely rare. In fact, it has only happened once since 2003. Check out those returns after the signal! As rare as this is, it suggests that demand for stocks is very high and being "overbought" isn't necessarily a bad thing.



We've been bullish for a while now, and although near-term things are pretty stretched, we are seeing incredible demand for stocks; historically, this is bullish. I see no reason to expect this summer rally will end anytime soon.

This article by Ryan Detrick, CMT, was originally published on Schaeffer's Investment Research.

Below, find some more great content from Schaeffer's Investment Research:


Daily Game Plan – Big Earnings on Deck

Trading 101: Consumer Discretionary Names Looking to Move Higher?

Analyst Downgrades: Applied Materials, Inc., McDonald's Corporation, and Yahoo! Inc.


Twitter: @schaeffers
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