NFTRH+; A US Stock Market ‘Pair’ Trade (Short & Long)

Reference the RUT-SPX chart that is shown each week in NFTRH.  We have followed the Russell 2000 leading the S&P 500 for all of 2016 and yet, it is approaching a potential limit point here at the top of the post-2013 downtrend channel.  While RUT-SPX could get another surge and hit the top of the channel, I am going to use a short against IWM (small caps) as a hedge to longs on large caps like Intel and Cisco.

rut-spx ratio

The daily chart of IWM shows a break below the 50 day moving averages.  I shorted it on today’s upside test.  If this breakdown fails and/or the market goes giddy again into new bull phase, I’ll let this go.  But for now, it seems to be a sensible trade.

iwm daily chart

This is no high risk speculation as I was not able to use leverage (I tried shorting 3x bull fund TNA but no shares were available to borrow) and again, it is a short against a couple large cap (and preferred global) long positions.  But I wanted to present the idea since we have been tracking RUT-SPX for so long now and it appears near a limit point.  Of course, the same trade can be applied as a straight long SPY, short IWM or it can be used by anyone with large cap exposure who agrees that risk in small caps is greater than large caps right now.

A side note is that small caps are not thought to do as well in rising interest rate environments as large caps, as it is harder for them to borrow at good terms and on average, there are less dividend payers among these companies.

Just trying to generate more ideas that are in line with the current macro backdrop, for your consideration.

A reminder that chart based NFTRH+ updates are technical trade setup ideas, which may not be revisited as the buy, sell, stop parameters are already noted. They are meant as a starting point for further research if interested. I will not personally buy every item highlighted and will sometimes sell – without prior notice (because this takes time and resource away from NFTRH’s main functions) – any item that I do buy, below target, which is something I often do as a trader. Also please be aware that I am not a fundamental stock analyst. Due diligence is your responsibility.