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Ominous Technical Signs For an Important Small-Cap ETF

This article was originally published on ETFTrends.com.

The iShares Russell 2000 ETF (IWM) , the largest exchange traded fund tracking smaller companies, and other small-cap ETFs have been under pressure in the fourth quarter. Now, some technical challenges are mounting for some small-cap funds.

Saddled with a fourth-quarter loss of just over 8%, IWM is close to seeing a death cross, the technical scenario where a security's 50-day moving average dips below its 200-day moving average.

“According to FactSet data, the Russell’s 50-day moving average is at 1,624.56, while the 200-day stands at 1,616.23, as of Nov. 9,” reports MarketWatch. “That is an 8.33-point differential, or 0.5%, which means that the Russell 2000, which has been seeing a steady rate of decline over the past few weeks, could see a so-called death cross manifest as early as next week, should the current downtrend hold.”

Bearish Ideas

For a good part of 2018, small-cap stocks and the related exchange traded funds were a popular trade as some market observers opined that the strong dollar and rising interest rates would not weigh on smaller companies.

Due to the domestic focus of small-cap companies, it was also believed these stocks would be less vulnerable to global trade spats, but recent price action in the group suggests otherwise.

In recent weeks, one of the best-performing small-cap ETFs has been the Direxion Daily Small Cap Bear 3X Shares (TZA) . TZA attempts to deliver triple the daily inverse performance of the Russell 2000 Index.

“Shares of smaller companies had climbed more than their larger counterparts because they were viewed as more resilient amid growing concerns about the U.S.’s trade spat with China. Small-cap companies derive the lion’s share of their revenues domestically,” reports MarketWatch.

Looking ahead, it will be hard to find additional reasons for small-caps to outperform large-caps as strong earnings and tax reforms have already been priced into the market, according to Morgan Stanley analysts.

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