After the recent sell-offs, the Russell 2000 and related small-cap exchange traded fund have formed a bearish indicator, with the short-term trend line falling below its long-term trend.
The iShares Russell 2000 ETF (NYSEArca: IWM) declined 1.3% Monday after falling 1.2% last week.
Meanwhile, the Russell 2000 index is forming what technical analysts call a “death cross” where the near-term 50-day moving average dips below its long-term 200-day moving average. The new trend indicates a bear market could be right around the corner and the long-term moving average is seen as the new resistance level.
So far this year, small-cap stocks have underperformed their larger counterparts. Year-to-date, IWM is down 0.6% while the S&P 500 gained 10.4%.
While the small-cap index has been weakening and is off 7% from its all-time high set at the start of July, large companies in the S&P 500 and the Dow Jones Industrial Average have been hitting new highs.
“Small caps are really under-performing again and I think that’s the main issue here,” JC O’Hara, chief market technician at FBN Securities Inc, said in a Bloomberg article. “We’re seeing the spread between the Russell and the S&P 500 widening out again and that is worrying some people. Traders want to see small caps participate and every time they don’t they think, ‘it’s still not working.’”
Nevertheless, the last time the Russell 2000 formed a death cross in July 2012, no significant sell-off followed as the index recovered and continued an uptrend, reports Robert Hum for CNBC.
Traders can also hedge against further dips in small-caps with inverse and leveraged ETF options. For instance, the ProShares Short Russell 2000 ETF (NYSEArca: RWM), which reflects the -1x or -100% daily performance of the Russell 2000 Index, have returned 1.1% over the past week. [ETFs to Hedge Against Potential Market Weakness]
Additionally, for the more aggressive trader, the ProShares UltraShort Russell 2000 ETF (NYSEArca: TWM), which tracks the -2x or -200% daily performance of the Russell 2000, increased 2.3% over the past week. The Direxion Daily Small Cap Bear 3X Shares (NYSEArca: TZA), which tracks the -3x or -300% daily performance of the Russell 2000, was 12.1% higher over the past week while the ProShares UltraPro Short Russell 2000 ETF (NYSEArca: SRTY), which also takes the -300% performance of the Russell 2000, was up 3.4%.
Potential investors should know that inverse and leveraged ETFs may not perfectly reflect their target strategies over a long period of time due to daily rebalances and the compounding effect.
Russell 2000 Index
For more information on small-capitalization stocks, visit our small-cap category.
Max Chen contributed to this article. Tom Lydon’s clients own shares of IWM.