In late December, everyone in and out of Wall Street promotes their investment picks for the new year. You can spend about $25 on your local newsstand and get all these forecasts. A month later, and many of the pundits are silent about their ideas and what to do next or now. So with almost one-twelfth of the year over and a lot more ahead, I want to wade in with my best idea -- go long the Russell 2000. My optimistic target is for a rise of 20% to 25% by May or early June.
The Russell 2000, begun in 1984, is formed by listing all companies in descending order by capitalization. In the U.S., the top 3,000 stocks (the 3,000 largest companies) make up the broad-market Russell 3000. The top 1,000 of those companies make up the large-cap Russell 1000, and the bottom 2,000 (the smallest companies) make up the small-cap Russell 2000 Index.
As a technical analyst or chartist I focus on the price movement, volume, and supporting indicators to reach my investment conclusions. I understand the fundamentals of stock valuation but I prefer the technical approach. Let's take a look at some simple charts and indicators.
This is a weekly chart of the Russell 2000, above. On the left side of the chart, you see the 2009 low followed by a major uptrend. The Russell made higher highs and higher lows (the simple definition of an uptrend) until early 2016. The uptrend was broken, but the Russell has since made a new high and a new uptrend line can be drawn. Along the bottom of the price chart are a series of curved lines used to identify cycles. Cycles are everywhere and, in the stock market, one of the dominant cycles is the 4-4-1/2-year cycle. Sometimes this is referred to as the Kitchin cycle. The cycle low or trough has been seen and the crest looks like it will be made in the May/June period of 2017.