Milton Friedman is one of my favorite economists (along with Thomas Sowell; I was once told by another economist, a seemingly green-eyed monster, that Sowell was “really a social scientist,” Ludwig von Mises, and Adam Smith) and for those interested he can be consulted via essentialscholars.org or his many lectures, or appearances on Donohue (talk show), that appear on YouTube.
Aside from his ground-breaking work (it has always been odd to me how modern-day economic practitioners never reference him), Friedman was also eminently quotable with memorable bon mots like, “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” And “If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.” And “Inflation is always and everywhere a monetary phenomenon.”
For the purposes of this note I’m altering the last of Mr. Friedman’s lines above to use it as follows with respect to the Russell 2000: “The Russell 2000 is always and everywhere an IWM phenomenon.” Translation: the Russell 2000 only gets going when PMs / HFs employ the IWM to get long(er) or cover their IWM short. It’s never because they decide to reallocate capital from big caps small cap. Imagine how ridiculous this would sound in an investment committee meeting – CIO: “Ok team, I’ve decided to sell some of our holdings in the Big 7. I want the analysts to find me 200 small cap stocks to buy.” There’s not enough cap in small cap to satisfy investors who hold big cap stocks. Just think, the market cap of the Big 7 / Mag 7 is almost 4 ½ times the market cap of the entire Russell 2000 and the market cap of the S&P is 15 times the market cap of the entire Russell 2000.
Since the 10/27/23 low the R2000 is up 21% with nearly all the gains occurring on 6 trading days that included 5 upside gaps. Check your daily charts to see the gaps on Nov 2 (+2.7%), Nov 3 (+2.7%), Nov 14 (5.4%), Dec 14 (2.7%), and Jan 22 (2%). Dec 13 was a non-gap day where the index added 3.5%. I don’t know what the statue of limitations (Seinfeld reference) is on daily upside gaps but maybe that’s the way things are going to be for this index – own the IWM and wait for the next upside gap.
Russell 2000 – Daily w/ 50- and 200-Day MAs and MACD
Thanks to the daily gaps, the R2000 / IWM is improving, albeit slowly, and price history suggests that the bear market that ended in Oct ‘22, the second worst for the R2000 in terms of time (24 months) since 1979, and the concurrent action since then is part of the BASING / building process for the index.
