Last week, I was a presenter at a virtual small-cap conference hosted by Benzinga. The focus of my presentation was opportunities in small caps based on technical and sentiment analysis of the Russell 2000 Index (RUT - 2,221.48) and iShares Russell 2000 ETF (IWM - 220.61). Much of what I presented revisited concepts you have likely seen in this weekly commentary since December. 

Specifically, I discussed that on the heels of the RUT breakout above its 2018 peak late last year, small caps represented the biggest area of opportunity for investors, because total short interest on Russell 2000 component stocks was (and remains) historically high. In comparison, total short interest on components of the S&P 500 Index (SPX - 3,974.54) and Nasdaq-100 Index (NDX - 12,979.11) were at historically low levels, leaving less room for short-covering rallies among larger-cap names.

At the same time, I mentioned that small-caps were vulnerable to a short-term pullback, due to small-cap equity option buyers coming off an extreme in optimism that usually occurs ahead of weakness. Moreover, I displayed these two graphs that captured the IWM and RUT showing vulnerability to a short-term setback. My two technical concerns were:

1. The IWM recently peaking near the $235 level, which corresponds to a round 20% year-to-date gain for the ETF, along with its 50-day and 80-day moving averages as potential support zones.
2. A long-term relative strength chart of the RUT vs SPX bumping up against a trendline marking lower highs since 2014.

These graphs are displayed immediately below.

My takeaways from these graphs were as follows:

1. If short-term weakness continued, I could see the IWM pulling back to the $210 area, which was the site of its 80-day moving average. My thought was a move below the popular 50-day moving average at $220 could flush out weaker hands. Plus, the 80-day moving average, which marked closing lows in late-October/early-November, was in the vicinity of the level that corresponds to 10% above the 2020 close, and 10% below the March 15 closing high. A 10% decline from intraday high in mid-February to intraday low in early-March induced heavy buying.
2. Changes in long-term relative strength of the RUT vs SPX tend to last for years, not months. This infers small-caps could be on the verge of outperforming their larger-cap counterparts for a long time -- albeit there could be short-term hiccups along the way.

Per my comments on Twitter after the close on March 24, the RUT was trading nearly 10% below the mid-March closing high, very similar to the mid-February to early-March price action. On March 24, the IWM closed at $212.04, with $210.60 corresponding to the level that was 10% below its March 15 closing high. After a brief move below $210.60 on Thursday morning, buyers indeed emerged. 

The jury is still out as to whether the move from the Thursday morning lows will be sustained and followed by a move to new highs. If you did not act on getting into long positions on Wednesday afternoon or Thursday morning, it is likely best for traders to at least see a couple of closes above the IWM $221 level, which is the site of its 50-day moving average, and d an extended trendline that connected lower highs from February into March. 

However, the $225 is another level of potential resistance, even if the IWM moves above $221 in the days ahead. The $2,225 level represents a breakeven point for those that bought the breakout above the trendline on March 10, as seen on the updated chart below. Absent the IWM getting above the $221-$225 area, we could see a retest of the Thursday morning lows at minimum.

In fact, while I like the fact that support levels I identified prior to Thursday’s low held, I do not like that this pullback has generated little fear among equity option buyers, which you will tend to see at significant troughs. 

For example, when the IWM peaked earlier this month, the 10-day, cumulative buy-to-open put/call volume ratio on IWM components was at a historically low reading of 0.34 -- not very different than the current reading. 

This would imply that rallies could be short-lived, like that of early-March to mid-March, which was resolved with an immediate retest of the early-March low last week. Higher levels of fear among equity option buyers on IWM components may be necessary before the next significant short-covering rally takes place in this group.

“If you are looking for technical permission to enter a bullish, large-cap technology trade… I think it is best if you look for resistance … to get taken out. Specifically…look for the NDX to climb back above a combination of its 40-day moving average, which marked last week’s peak. Plus, the 13,000 level and 13,037, which is a 50% Fibonacci retracement of the recent closing high and low, remain significant.”

          - Monday Morning Outlook, March 22, 2021

If taking on equity risk, I still prefer small caps to large caps, especially relative to larger-cap technology stocks. While the NDX found a bottom earlier this month in an area 10% below its February high, the fear the pullback generated is unwinding, though the NDX failed at potential key resistance levels that I discussed last week. 

Whether you key on round numbers, moving averages, Fibonacci retracements or year-to-date breakeven levels, the NDX comes into the week below 13,000, and its 2020 close at 12,888 (albeit barely). Moreover, a rally early last week was stopped at its declining 40-day moving average, after a Monday close above 13,037, or 50% retracement of the February high and low. 

The second half of March has been nothing to write home about for this group, and the shorts are not helping matters, perhaps using rallies to re-establish short positions, per the near 7% increase in short interest on components of the Invesco QQQ Trust Series ETF (QQQ -- 316.00) in the latest short interest report. With short interest on QQQ components at multi-year lows, increasing shorting activity could present a major headwind that I do not see as big of a risk factor for the smaller cap names, per the charts below.

Whether it is the NDX or RUT, there is more work to be done as far as overcoming the short-term resistance level. But beyond the short-term technical backdrop, I would still emphasize smaller caps, as I would expect that if stocks rally, leadership will come from the small-cap names. 

Todd Salamone is Schaeffer's Senior V.P. of Research

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• The Week Ahead: Wall Street Welcomes April With Manufacturing Numbers, Jobs Data
• Indicator of the Week: A Look at SPX Performance 1 Year After the Covid-19 Bottom

There's plenty of economic data to digest as investors say goodbye to March and usher in a new month this week. The week will start quietly, highlighted by the Case-Shiller national home price index. A deluge of data will follow, including more unemployment numbers, as well as the Markit manufacturing purchasing managers' index (PMI), and the ISM manufacturing index.

The earnings slate will be relatively clean this week, though Walgreens Boots Alliance (WBA), Cal-Maine Foods (CALM), CarMax (KMX), Chewy (CHWY), lululemon athletica (LULU), and Micron (MU) all have quarterly reports due out.

It was a volatile week for Wall Street, with the one-year anniversary of the pandemic bottom, a global uptick in Covid-19 infections, and vaccine updates holding the spotlight. Things were off to a good start on Monday -- the 10-year Treasury yield tumbled, helping the tech sector move higher. Also boosting investor sentiment was the accelerated pace of vaccine programs in the U.S., and AstraZeneca's (AZN) encouraging trial results. In turn, Wall Street's "fear gauge," the Cboe Volatility Index (VIX), fell to an annual low and logged its ninth loss in 10 sessions. However, sentiment took a turn on Tuesday, which marked one year since the pandemic wreaked havoc in the market. Traders moved to take profits from reopening stocks, as virus variants led to a rising number of cases across the globe. Meanwhile, U.S. Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen reinforced the central bank's monetary policy. 

Stocks extended their losses on Wednesday, as the global tally of coronavirus cases surpassed the 124 million mark. All three major benchmarks were lower, while the VIX logged back-to-back wins for the first time since March 4. Thursday was spent mostly in the red as well, though stocks managed to pivot higher by the end of the session thanks to retreating bond yields. Finally on Friday, the Federal Reserve announced financial institutions could resume buyback programs and raise dividends by late June, giving sentiment a boost. Better-than-expected consumer sentiment data also helped stocks, as did the core personal consumption expenditure price index. At last check, both the Dow and S&P 500 were staring at weekly wins, though the tech-heavy Nasdaq was on track for a loss.

Bullish Sentiment Towards Tech Names

A handful of tech names made headlines this week. Social media giant Snap (SNAP) was among them, after it flashed a bull signal that may help it move closer to its record highs. Blue-chip Microsoft (MSFT) was also turning heads, with options traders blasting the stock after reports the company is in talks to buy videogame chat platform Discord. Similarly, streaming giant Netflix (NFLX) attracted options bulls after a lofty upgrade from Argus Research, which praised the company for its popular original content and global expansion. The same cannot be said for Adobe (ADBE), which moved lower despite a slew of bull notes and upbeat first-quarter forecast.

Reopening Stocks Continue to Draw Attention

Stocks that depend on the reopening of the economy also captured investors' attention. For one, JetBlue (JBLU) took a tumble this week, after announcing a convertible debt deal. Another airline name that was front and center was Southwest Airlines (LUV), after one analyst called it "one of the best low-cost carriers." Meanwhile, Burger King parent Restaurant Brands International (QSR) had technical support in place, and could soon benefit from a short squeeze. Finally, Darden Restaurants (DRI) was higher, after the Olive Garden owner reported better-than-expected fiscal third-quarter earnings and revenue.

Holiday-Shortened Week Packed Full of Economic Indicators

The upcoming week will be a short one, with markets closed on Friday in observance of the Good Friday holiday, but it will leave nothing to be desired in terms of economic data. Investors will be bidding goodbye to March as they sift through the Case-Shiller national home price index, more unemployment numbers, the Markit manufacturing purchasing managers' index (PMI), and the ISM manufacturing index. As far as earnings, they will be looking ahead to reports from Chewy (CHWY), Lululemon (LULU), and Walgreens Boots Alliance (WBA), to name a few. Get ahead of next week's events by diving into why Wall Street's "fear gauge" could see even more March madness, and take a deeper look into the S&P 500's performance one year after the Covid-19 bottom.

Welcome back to our weekly series, Schaeffer's Cannabis Stock News Update, where we recap what happened in the world of marijuana stocks last week, and look ahead to how the cannabis industry will continue to develop in the 2021.

Investor interest in the cannabis industry is growing at an explosive growth rate, and the leading players continue to break through legal barrier after legal barrier, especially in the United States. More than 40 U.S. states legalized recreational and/or medical marijuana by the end of 2020. Now, more and more companies are starting to see the opportunity in cannabis cultivation, marketing, distribution, and technology.

On March 22, a top New York senator  said that lawmakers and the governor have successfully resolved an outstanding issue in marijuana legalization negotiations in New York related to impaired driving. This sets the stage for a formal introduction of a new bill within days.

Here is a quick roundup of major cannabis stock news this week:

Akerna (NASDAQ:KERN), developer of the cannabis industry's first seed-to-sale enterprise resource planning (ERP) software technology (MJ Platform®), reported its unaudited financial results on March 22 for the quarter ending on December 31. Total revenue was $4.1 million, up 24% year-over-year. Total revenue reported was$4.1 million, also up 24% year-over-year.

GrowGeneration Corp. (NASDAQ:GRWG) confirmed its eighth acquisition in 2021, this time purchasing the wholesale agriculture platform, Argon.io. The platform developed by Argon.io offers greenhouses, controlled environmental systems, HVAC, and industrial cannabis gear. According to GrowGeneration CEO, "The Agron.io platform is a strategic and exciting addition to our portfolio and comes with a highly skilled team of customer service experts trained to help growers navigate the complexities of planning, growing and sustaining a commercial agriculture facility." He further stated, "By joining forces with GrowGen, we can reach even more commercial growers with enhanced services, competitive pricing and drop-shipping from the nearest GrowGen distribution center."

22nd Century Group, Inc. (NYSE:XXII), a leading plant-based, biotechnology company focused on tobacco harm reduction, very low nicotine content tobacco, and cannabis research,  congratulated Xavier Becerra on March 19 as the new Secretary of the U.S. Department of Health and Human Services (HHS).

Greenlane Holdings Inc. (NASDAQ:GNLN), in a joint venture with Berner entited VIBES Fine Rolling Papers, launched a new brand of organic hemp rolling papers and cones. The launch features papers that are 100% organic hemp fibers that come in three different sizes. According to Greenlane's CEO, "Greenlane is proud to work alongside Berner to produce new and innovative products for VIBES. Discerning connoisseurs that demand nothing short of the finest quality are top of mind when we develop products like the VIBES Organic Hemp line."

The Russell 2000 Index (RUT) has been on a tear in the last 12 months. To the uninitiated, choosing small-caps may seem like a daunting task akin to throwing darts at a dart board. Against this backdrop, Benzinga sat down with Senior V.P. of Research Todd Salamone at Schaeffer’s Investment Research to talk about some of the implications of the RUT's rise and the importance of education in order to make informed investment decisions.

Below is an excerpt of the article, which can also be found here.

Small-cap stocks have been soaring over the past few months, with the small-cap Russell 2000 Index (RUT) outperforming large-cap indexes such as the S&P 500 and Nasdaq 100 that are relatively flat on the year.

The Russell 2000, which tracks 2,000 small-cap companies, is up 18.5% year-to-date as of March 18, 2021. In comparison, the Nasdaq 100, which is made up of the 100 largest non-financial companies in the technology-heavy index, is up 1.2% YTD. Although still early in 2021, this marks a distinct change from previous years in which value-oriented small caps have struggled to garner quite the same investor attention as more high-profile, performance stocks.

In further examining the rise in small-cap stocks, Senior Vice President of Schaeffer’s Investment Research Todd Salamone spoke with Benzinga regarding his thoughts on the rise of small caps, as well as, what small-cap companies investors should keep an eye on and how investors can position themselves for an economic rebound.

Salamone also attended the recent Benzinga Global Small Cap Conference, which took place from March 24-25, to share the following analysis as well as additional insight with attendees. The two-day conference featured presentations from executive leadership of small-cap stocks, specifically in the biotech industry. 

Will The Small-Cap Rally Continue?

Small-cap stocks have had a remarkable run during the pandemic. As a result of this growth, many traders have been left to question whether or not this trend will continue in the months ahead. 

According to Salamone, the technical picture of Russell 2000 and ETFs like the iShares Russell 2000 ETF (IWM) 1.05% does suggest that the rising trend will likely continue.

At the end of 2020, the iShares Russell 2000 ETF (IWM) experienced a breakout above the $175 area, which is double the $86-$87 resistance level that was in place from 2007-2012, Salamone noted. 

“In fact, the $175 area marked a huge IWM peak in late 2018 and this level didn’t get taken out until late last year. In other words, there was a lot of profit-taking as buyers that bought the 2013 breakout re-assessed risk from 2018 into late 2020,” said Salamone.
  
He also noted that long-term breakouts such as this one are usually long-lasting, “especially when there are still many pessimists, which was the case in late 2020 as was evident by the huge short interest on IWM components.”

Companies To Watch

Schaeffer’s Investment Research favors companies that display strong price action while sentiment measures indicate some lingering doubt. Salamone noted that this skepticism represents future buying power as the market is proving naysayers wrong who might be forced to eventually capitulate.  

Given this preference, here are a few names on Schaeffer’s radar in the small-cap space:

Shake Shack, Inc. (NYSE:SHAK) is an American burger chain with about 275 locations worldwide and a $5 billion market cap. Given the number of locations and current market cap, this leaves room for tremendous growth potential for the company as the world continues to slowly step out from under the shadow of the pandemic. In 2021, the stock has hit new all-time highs, with current YTD performance up 40% as of March 18, 2021. The company also has the potential to garner future positive sell-side attention, as only four of the 23 analysts following SHAK rate it a buy. 

United States Steel Corporation (NYSE:X) and Alcoa Corp (NYSE:AA)
U.S. steel is an American integrated steel producer and Alcoa is an American industrial company as well as the world's eighth-largest producer of aluminum. Both companies have market caps of around $6 billion and low analyst ratings, which provides them with a lot of upgrade potential. 

Aspira Women’s Health (NYSE:AWH)
Develops gynecologic tests for identifying ovarian cancer and other gynecologic diseases. The company has a market cap of less than $1 billion. They expanded network access in October. AWH had a multi-year breakout in late January above the 2011 intraday peak but shares were still well off from their all-time high in 2003.

Sonos Inc (NASDAQ:SONO)
A developer and manufacturer of wireless, multi-room audio systems. The company has a $5 billion market cap. In November, the company announced a buyback plan and shares gapped higher in mid-February on earnings. Shares are currently surging both YTD and year-over-year, up 72% and 479% respectively.  

Economic Rebound

Speaking on small caps holistically, Salamone singled out the iShares Russell 2000 ETF (IWM) as offering diverse exposure to the small cap segment. The ETF is comprised of stocks throughout 11 different sectors, with the five biggest areas of exposure being a mix of growth and value segments like health care (the largest), consumer cyclicals, industrials, financial services, and technology (the smallest).

Salamone noted that investors may want to keep these main sectors in mind when putting together their portfolios.

“The interest rate environment in recent months has favored financial services and industrials, and consumer cyclicals are a great way to position yourself for an economic rebound.”