Russell muscle and metal momentum

Traders like to go where the action is, but with the equity market in flux in recent weeks, it can sometimes be difficult to see which way the momentum winds are blowing.

Case in point: The tech-centric Nasdaq 100 (NDX) may have the best year-to-date return among major US indexes, but that leadership is a bit deceptive, since the overwhelming majority of the index’s gains came in the first four weeks of 2018.

It’s hardly been a secret, but if you’ve followed the weekly recaps that appear in this space on Mondays, you’ve probably noticed the shift away from tech toward other areas of the market. The NDX was the strongest US index in four of the first five weeks of the year, but it’s been the weakest in three of the past five, including last week.

The arguable beneficiary? Small caps.

The small-cap Russell 2000 (RUT) was the only other major US index up on the year as of yesterday, and it’s actually been the strongest of the bunch since early February, as illustrated by the following 60-minute relative performance chart of the RUT, SPX, and NDX from February 2 to yesterday:

Russell 2000 (RUT) vs. S&P 500 (SPX) and Nasdaq 100 (NDX) 2/2/18 – 4/24/18. 60-minute price chart.

Source: OptionsHouse

Even yesterday’s sell-off offered a good example of its current strength, as the Russell was down only around 0.9% intraday when the SPX was 1.7% in the red and the NDX was down 2.4%. And, as noted on Monday, the Russell is the US index that is closest to its all-time high.

Enter Commercial Metals Company (CMC), a small-cap metals manufacturer (everything from processing scrap and recycling to producing steel bars) that’s been on an upswing since its early April swing low:

Commercial Metals Company (CMC) 10/9/17 – 4/24/18. Daily price chart. Paused at resistance

Source: OptionsHouse

CMC came across the wire recently when it announced its intended purchase of Brazilian steel maker Gerdau S.A. through the sale of $350 million in bonds.1

The two down gaps followed by big down days (one in March and one in October) on the chart are two recent earnings misses; the big jump at the beginning of the year, in contrast, was an earnings beat. But with earnings in the rear-view mirror for a while, traders don’t have to worry about getting knocked out of positions by being on the wrong side of a quarterly forecast.

That doesn’t mean CMC is likely to lack momentum, though—far from it. The stock’s average close-to-close move over the past 100 days has been around 2% (up or down), and it’s most recent momentum move—a 13% rally from April 6 to April 18—concluded (for now) with a consolidation right below a support/resistance level dating back to last October. The stock, which could be expected to back-pedal a bit after making such a strong move, has persisted in knock-knock-knockin’ on the door of resistance. If that door opens, momentum could ramp up again.

Finally, in addition to having small-cap relative strength in its corner, CMC could also potentially profit from the current geopolitical climate. Although the stock has alternately benefited from, and been burned by, the “tariff on, tariff off” see-saw in recent weeks, with the overall cycle appearing to be in “tariff off” mode, renewed hostilities—especially those aimed at steel and other metals—could boost CMC share prices.

Yield Watch. Well, it finally happened: 10-year Treasury yields finally broke above the widely watched 3% threshold yesterday, pressuring equities, which slipped into negative territory after being up on the day.


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1 Moody’s Investors Service. Moody's assigns Ba3 rating to CMC's proposed notes; all other ratings remain on review for downgrade. 4/19/18.