Short Small Caps with RWM

Successful investing requires different perspectives. For one, you need a close-up picture. That’s why investors use short-term charts, CNBC, and Fox Business. A short-term perspective shows you what’s happening today or this week. You can even get up-to-the minute market action with real-time charting for day trading. While this may help you find good entry and exit points, there’s a major problem: you might miss the forest because of all the trees.

Every snapshot is part of a bigger picture. That’s why a longer-term perspective is also essential. Looking at weekly or monthly charts helps remind you that your investments are comprised of more than daily price fluctuations. They exist in a larger continuum of market action.

Despite a short-term bounce this week, we think stocks are still heading down. November 2009 support was taken out last week. Volatility has reached last summer’s levels and global pressures are driving equities lower. Governmental efforts to stop the downturn seem to be failing. Robert Reich, former U.S. Labor Secretary recently said, “The economy is still in the gravitational pull of the Great Recession. All the booster rockets for getting us beyond it are failing.”

Every bear market has its share of good days, but right now the medium-term bearish trend is still in place. Stocks are anything but stable. We’ve been riding this downtrend since June 17 with an inverse S&P 500 ETF, SDS. As of Wednesday’s close, that trade was up +9.6%.

Instead of re-recommending a broad-based short ETF, we think it’s time to get strategic. The weakest part of the U.S. equity market is small caps, publicly-traded companies with market values between $300 million and $2 billion.

Small caps are often tied to consumer spending. Since the Consumer Confidence Index dropped sharply in June (from 62.7 to 52.9), stocks with higher consumer exposure are not faring well. Small-cap stocks in the S&P 600 and the Russell 2000 both fell for the sixth day in a row on Tuesday.

One good way to take advantage of the small cap implosion is Short Russell 2000 ProShares (RWM). This ETF “seeks daily investment results, before fees and expenses, which correspond to the inverse of the daily performance of the Russell 2000 index.” In other words, when the Russell 2000 (U.S.-based small caps) falls, RWM appreciates. RWM is a non-leveraged ETF that should generally go up as the Russell 2000 goes down. However, since it rebalances every day and is subject to fees and expenses, don’t expect a one-for-one correlation.

On the chart, RWM broke through resistance on July 1, a level that is being tested this week. Next stop may be the intermediate-term high set in February near $47. A breakout above that level would open the door for even higher prices. No long-term move will happen without dips along the way, of course. Even with those considerations, RWM looks like a solid pick for this week. To win when small caps lose, go with RWM.

Disclosure covering writer, editor, publisher, and affiliates: No positions in any of the securities mentioned. No positions in any of the companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.