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Small-Caps Were Big Winners in 2020 - Will They Lead Again in 2021?

Small-cap stocks have been dominate over the last six months and the Russell 2000 has roared to all-time highs. Here's how to trade the index now.

It's been a quite volatile 2020, but as we approach the end of the year certain groups are showing their strength.

Specifically, small-cap stocks are leading the way.

While tech has dominated the run - with the Nasdaq up more than 42% so far this year - the Russell 2000 has established itself as a momentum leader as well.

First, the Russell 2000’s 19.2% year-to-date return trumps both the S&P 500 and Dow Jones Industrial Average. More impressively, its one-, three- and six-month returns handily beat the Nasdaq, S&P 500 and Dow.

Up 38.8% over the past six months, the next best performer is the Nasdaq, which is up 27.3%. It's hard to believe how well the Russell has done since bottoming out near our downside target from March. 

The returns are similar when comparing the iShares Russell 2000 ETF  (IWM) - Get iShares Russell 2000 ETF Report, SPDR S&P 500 Trust ETF  (SPY) - Get SPDR S&P 500 ETF Trust Report, SPDR Dow Jones Industrial Average ETF  (DIA) - Get SPDR Dow Jones Industrial Average ETF Report and the Invesco QQQ ETF  (QQQ) - Get PowerShares QQQ Trust Ser 1 Report.

The question: Can small-cap stocks maintain momentum?

Trading the Russell 2000

Daily chart of the IWM.

Daily chart of the IWM.

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A glance at the chart above shows just how strong the IWM ETF has been, particularly since late October.

The stock’s tag of its 100-day moving average ignited the share price higher, sending the stock roaring from about $150 to Wednesday’s high of $199.37.

Admittedly, this does leave the stock in a bit of an overbought state according to the RSI reading at the bottom of the chart. That’s been the case for about a month now, though. On its own, it’s not a reason to be a seller.

I am not in the business of blindly shorting strength, nor am I in the business of firing stocks that continue to do their job. At this rate, the IWM is about to be our employee of the month.

That doesn’t mean bulls shouldn’t take some profit along the way, only that there is no reason to be outright bearish on small-cap stocks at this time.

For now, the 10-day moving average continues to anchor the IWM as support. A break of this mark and bulls may want to pay attention, though.

Should the stock lose this support mark, look for the 21-day moving average, November high at $185.44 and the volume weighted average price (VWAP) measure to buoy the stock.

Below opens it up to the 50-day moving average, as well as the prior all-time highs from 2018 and 2020 at $173.39 and $170.56, respectively.

On the upside, the IWM is now trading up into the 138.2% extension near $199. It seems like it may need to rest, but a solid intermediate term target could be the 161.8% extension near $217.