2024 was an extraordinary trading and investing year, and likely 2025 will follow suit with the added volatility from the Trump Presidency. If you recall, his first presidency was marked by market gyrations each time he hit the tweet button, and there is no reason we cannot expect the same.
In the meantime, the usual Santa rally failed to materialize this year, nixed by the FED’s hawkish cut in December, a scenario similar to what we saw in 2018. The difference in 2018 was that whilst the FED raised rates, as expected, the language in its statement suggested a more aggressive path of increases ahead. The market was also spooked by the FED’s proposed reduction in its balance sheet. However, this was all forgotten in the New Year as January ended higher, leading to a steady rally higher for the S&P 500. The question is, will the same thing happen again this time? One way we can answer this is whether the ‘January effect’ will come into play.
The ‘January effect’ refers to a phenomenon where stock prices tend to rise in January more than any other month, particularly of small-cap stocks, which is interesting as the IWM (the ETF for the Russell 2000 index) has been lagging behind the other major indices. One reason for this lag is that the price action in the S&P 500 & Nasdaq is driven by a small number of stocks, thereby distorting their performance. This raises serious issues about the validity and sustainability of passive investing in instruments like the SPY & QQQ, with market commentators now questioning how long this distortion can continue and whether it will lead to a significant correction and/or crash of the market.
Returning to the IWM, particularly the monthly chart (see above), we can see the ETF failed last month to take out the Nov 2021 ATH of $244.46, resulting in the two-bar reversal pattern. The pattern recognition indicator on Tradingview has also highlighted the rising wedge and 2nd top to the current chart structure with the downside targets should these patterns play out. However, whilst this feature in TV can be helpful, we should never forget that chart patterns do not always play out, and we should always read them in conjunction with the price action and volume signals. The monthly chart for the IWM does suggest a bearish picture for the ETF, but this may take some time to develop as the IWM may move higher and retest that ATH driven by the ‘January effect’.
When we move to the daily chart for the IWM, we can see the price action is above both the volume point of control and the strong resistance in the $222.43 area, which has now become strong support.
Interesting times ahead for both traders and investors.