Small-Cap ETFs May Signal Big Trouble for Market

Small-cap ETFs were holding up better than their large-cap peers in Tuesday’s sell-off but that hasn’t been the case the past month. The recent underperformance of small-cap ETFs such as iShares Russell 2000 (NYSEArca: IWM) has some worrying the rally has grown long in the tooth.

IWM was down 3.9% for the month ended Oct. 22, more than double the 1.7% loss for SPDR S&P 500 (NYSEArca: SPY), according to Morningstar data.

Small-caps tend to lead the market in risk-on rallies, so their recent underperformance is a warning sign for the bulls.

The small-caps have been providing downside leadership since the mid-September high, says Investors Intelligence technical analyst Tarquin Coe.

“The Russell 2000 chart printed a bull-trap with the failed breakout of the March highs. That breakout was on weak breadth,” he wrote in a newsletter Monday. “That indicator showed a strong negative divergence on the breakout, revealing that not all the troops were participating with the advance. When that occurs, more often than not, there is swift retreat.”

The small-cap index is in a falling channel and dropping through the floor of the channel would indicate an accelerating downtrend, Coe added.

Full disclosure: Tom Lydon’s clients own SPY and IWM.

Post Comment