Russell 2000 (RUT) (IWM) Small-Cap Index Plunges into Bear Market
Recent market plunges have been painful to watch, and Monday was no exception. Any quick glance at a chart of a major benchmark index — the S&P 500, Dow, or Nasdaq — would prompt most bullish investors to avert their eyes.
Small-Cap Stocks Getting Pummeled
But the story gets even worse for small caps (stocks with lower market values) as seen on the most popular small-cap index, the Russell 2000 (RUT). Though the Russell 2000 cannot be invested in directly, the most common way to trade it is through an ETF like IWM (iShares Russell 2000 Index Fund).
Sustained Slide for Russell 2000
Since the current market slide began in early September, the Russell 2000 chart has been predominantly red (bearish), with only brief periods of respite in green (bullish). As of Monday, the Russell 2000 has officially fallen into ‘bear market territory,’ which is generally defined as a fall of 20% or more from the most recent peak (August 31, in this case). To be more precise, from the August 31st closing high at $1740 to Monday’s market close of $1378, the small-cap index has fallen a whopping 20.8%.
Russell 2000: A Leading Indicator
It should be noted that the Russell 2000 has led the other major indexes in declines during the past few months of heightened volatility. The Russell 2000 is considered by many to be a leading indicator of the entire market, and it has been fulfilling this role faithfully for the past three months.
The Russell 2000 first began its steep declines back in early September, while the S&P 500, Dow, and Nasdaq — all large-cap indexes — began to plunge a month later. Also, while the Russell 2000 is now in a bear market more than 20% below its peak, the large-cap indexes are only deep in correction territory. The S&P 500 is down around 13%, the Dow 12%, and Nasdaq 16% as of Monday’s close.
If the Russell 2000 is indeed a leading indicator for the overall markets, we could be seeing significantly more volatility and declines on the horizon for the other major indexes.
On the immediate horizon, the Federal Reserve (Fed) has its key FOMC rate decision on Wednesday. The market is largely expecting a 25-basis-point rate hike at that time. If the Fed is more dovish than expected with respect to future rate hikes, stocks could get a boost. But a dovish decision is already priced into the markets. Therefore, if the Fed raises interest rates and also signals a continued brisk pace of rate increases into 2019 and beyond, this could lead to another leg down for the stock market.
IMPORTANT: The information above should not be construed as investment advice and should not be considered as a solicitation to buy or sell securities. Trading and investing in the financial markets involves substantial risk of loss, and may not be suitable for all investors.
Disclosure: At the time of this article’s publication, we have no position in any security or trade/investment mentioned, nor do we have any business relationship with any company whose stock may be mentioned.
Senior Market Analyst at The Technicals
A veteran global macro trader/analyst, Bart focuses on major market moves in currencies, commodities, fixed income, and global equity indexes. Bart stresses inter-market correlations and dynamics while keeping a close eye on risk. He has published countless market analysis pieces and has been a guest expert for a variety of major financial media. Contact Bart