Small-Cap ETFs May Signal Big Trouble for Market

ETF Trends

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 (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 (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.

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

The opinions and forecasts expressed herein are solely those of John Spence, 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.

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