After the bout of recent sell-offs, small-cap exchange traded funds have dipped below their long-term trendlines, with the benchmark Russell 2000 Index trading below its 200-day moving average for the first time since late 2012.
The iShares Russell 2000 ETF (NYSEArca: IWM) is down 4.3% year-to-date and is now hovering around 0.6% below its 200-day simple moving average.
The benchmark Russell 2000 Small-Cap Index dropped below its 200-day average Tuesday for the first time since November 2012 and continued to weaken Wednesday. The index is now trading 1.1% below its long-term trend line.
“Yesterday the Russell 2000 closed below its 200 day moving average for the first time since November 2012,” Peter Boockvar, Managing Director and Chief Market Analyst, said, according to Josh Brown, the Reformed Broker. “Over the past few weeks it has traded below intraday but always found the buyers on the dip to save the day.”
However, if small-caps continue to languish, this could eventually pull down the broader markets.
“This may be a meaningless one day event but I highlight this because if it’s not, it will have broader implications possibly for the rest of the market in terms of the big picture technicals,” Boockvar added.
Specifically, Josh Brown points out that in a relative strength comparison, small-cap stocks are falling behind the broader markets. As large-caps struggle near their all-time highs, a dip in economically sensitive small-caps could portend weakness ahead, and history shows that such a situation tends to resolve toward the downside.
On the other hand, a turn around in small-caps could help support continued broad market strength.
“If small caps can finally right their collective ship, then the S&P 500 could very well have the support it needs to break through 1900,” Frank Cappelleri, a sales trader at brokerage firm Instinet, said in a Wall street Journal article.
iShares Russell 2000 ETF
For more information on small-capitalization stocks, visit our small-cap category.
Tom Lydon’s clients own shares of IWM.