Even after Memorial day, iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) and ProShares Ultra Russell2000 (ETF) (NYSEARCA:UWM) are in Play

The week leading up to memorial day is typically ruled by smaller investors and smaller investors generally are predominately interested in only buying the market.  They also seem to focus on small caps stocks more than large cap stocks, which out iShares Russell 2000 Index (ETF) (NYSEARCA:IWM) and ProShares Ultra Russell2000 (ETF) (NYSEARCA:UWM) in play last week.  In addition, over extended weekends, short sellers are usually apprehensive to hold short positions, so they often cover, and that combination can help rationalize last week’s increase.

There were aggressive, one-sided, and momentum driven moves higher last week on very little news.  All the signs were there that last week was a typical pre-Memorial Day week, and usually that mindset and rationale rolls over at the beginning of the following week, with one subtle difference.

The week following Labor Day usually shows signs that larger investors have returned, and I believe we have also seen that by the action in the DJIA so far; the selling pressure in the DJIA tells us that larger investors are active again, but the bid in the NASDAQ and Russell 2000 still exists.

In fact, short sellers may not be rushing to get back in right away either.

Shorting and selling on strength is preferred, of course, and if the perception is that ‘they can run this a little more’ those short sellers and institutions who may be interested in selling on strength may very well perceive that they can get better prices if they wait a little longer.

I am taking his approach, my discussion is more about selling than buying, because I am confident that there is a pent up desire to sell again and it will hit again at some point.  I say this because of valuation concerns (I have addressed these before) and because of the all-time-low in the Cash-Margin Debt ratio.  As-reported NYSE Cash-Margin holdings are still very close to all-time lows, suggesting that institutions have far less cash on hand as a percentage of margin debt when compared to historical norms, and that means they not only have a limited ability to buy the dips, but that they will also have a greater degree of interest in selling into strength.

The questions is, when should they do that?

As this post-Holiday week began we saw selling pressure in the DJIA, but again not in the more aggressive markets, the Russell and NASDAQ, and in fact the NASDAQ and Russell 2000 were both trying to break above our stated longer term intra channel resistance levels (4945 and 1148).  If they are successful, the upside potential will be meaningful and potentially immediate again.

Given the breaks that were taking place at the time I wrote this, upside probability is high, especially in the NASDAQ and Russell, and selling pressure is only likely to increase again either after another rally, or if the markets reverse below former resistance levels, which have now been converted into support by rule.  This is our technical observation, and that is the driving force behind our trading decisions.

However, there is plenty of potentially market moving news on the table too.

  1.  The ECB rate decision
  2. A number of FOMC Speeches
  3. The employment data

Probabilities, given the positive sentiment that exists right now, suggests that Wall Street will search out the good news to rationalize higher levels more than focus on the bad, or the risks.

Our LETS trading strategy was holding ProShares Ultra QQQ (ETF) (NYSEARCA:QLD) when this was written, but that is subject to change based on the technical patterns that govern this strategy.

Real Time information about our buy and sell alerts can be found by monitoring the corporate website and Newsletter of Stock Traders Daily.