Small-cap stocks and the related exchange traded funds were among the assets that were drubbed as stocks tumbled last month.
The iShares Russell 2000 ETF (NYSEArca: IWM) suffered a double-digit loss last month and still resides nearly 11% below its 52-week high, but the benchmark small-cap fund is up nearly 5% over th past week.
“So while it’s plain to see why IWM was punished more harshly than its peers in this latest round of selling, it’s worth pointing out that the fund still has several layers of support in place to stem further bleeding, should volatility continue to haunt equity markets in the weeks ahead,” according to Schaeffer’s Investment Research.
Small-capitalization stocks have attracted a lot of attention on the escalating trade tensions, fueled by fears over a potential slowdown in global growth. Consequently, many anticipated that small-caps could weather the storm as large multi-nationals with a large global footprint suffered from trade disputes. However, the U.S.’s recent trade agreements with Canada, Mexico and the European Union have reversed the play.
What’s Next for Small Caps
Bank of America Merrill Lynch analysts also warned that small-cap’s are now highly leveraged and rely on a smooth economic environment. Excluding financial companies, the Russell 2000 Index’s corporate debt was roughly 3.5 times earnings before interest, taxes, depreciation and amortization, or close to all-time highs hit in the early 2000s and above the 1.8 times EBITDA ratio for the S&P 500.
“Beyond the 200-day, look at the significance of the 80-week moving average for IWM, as our Senior V.P. of Research Todd Salamone recently advised with regards to the S&P,” said Schaeffer’s. “And perhaps most crucially, note the highlighted support around the $145 level for IWM. After marking a high in July 2017, this area has caught several lows for IWM over the past year, and would be a natural place for any further panic selling to exhaust itself as the incorrigible small-cap dip buyers step in.”
Investors have pulled $672.45 million from IWM since the start of the fourth quarter.
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Tom Lydon’s clients own shares of IWM.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.