Small Cap Stocks and Semiconductors Providing Clues for Market Trend in September

Pinnacle Digest writes: Small caps and the semiconductor sector are the most speculative market bets one can make. They often provide us with signals as to what the market may do in the near-future. In Gary Tanashian’s latest article he breaks down what he thinks both sectors are telling us to prepare for.

Tanashian explains that when looking at the small-caps from May until July, the signals were mixed. At times, the technical signals from the small-cap sector were looking bullish only to be very bearish a week or two later. The data during that time period was never strong enough to make a confident bet.

After reviewing the technical data coming from the IWN ETF (small cap ETF), Tanashain makes a bold prediction.  He states “Today we update the IWM ETF and find a maturing Cup - complete with Inverted H&S characteristics (it's not an H&S reversal pattern because there was no previous downtrend from which to reverse) - that would ideally break above the red neckline, form a Handle and move higher to the ridiculous sounding target of the equivalent of RUT 930 or IWM 92.”

The significance for the potential target of 92 is that the IWN currently sits around 81. For a small cap ETF to have the potential for nearly a 14% rally, there must be many factors in play which are rooted to the broader market. Risk tolerance is spreading. Small-caps rarely, if ever, move aggressively upwards on their own. Usually the entire market comes with them as they require a high degree of risk tolerance - hence the relevance of analysing the small-cap sector. It can provide investors with many important clues for the rest of the market.

Interestingly enough, the semiconductor sector, from a chart standpoint, looks bullish as well (according to Tanashain) after a strong consolidation period over the summer. However, Tanashain explains that much like the economy, the fundamentals behind the semiconductor sector look quite weak. In fact, Tanashian stated in his recent article “Interestingly, I talked with an associate the other day who - unlike your blogger - remains intimately involved with the semiconductor industry and the manufacturing sector in general.  He told me that semi is ‘dead in the water’.”

So while common sense and a weak economy tell us the markets should dip lower, especially the high-risk part of the market, the technicals are giving us a whole different outlook.

Click here to read Gary Tanashian’s full report by clicking here.