The iShares Russell 2000 ETF (IWM) crashed hard in the futures market as investors dumped small cap stocks. It dropped to $221.60 on Monday, its lowest level on January 14. It has crashed by almost 10% from its highest level in November last year. So, what next for the IWM ETF?
Why is the IWM ETF is crashing?
The Russell 2000 index and other global indices crashed hard this week as concerns about the American economy remains. Futures tied to the Nasdaq 100 and S&P 500 indices have crashed by over 2%.
These indices dropped because of the ongoing fears of tariffs, which will hit small-cap companies harder than giants like Apple, Microsoft, and NVIDIA that do business globally.
Small-cap companies are often domestic ones and don’t have the balance sheets that the mega-cap names have.
The new tariffs on China, Mexico, and Canada will greatly impact corporate America, which will now pay more for their imports. They will also have to increase prices, a move that may reduce consumer spending and affect their margins.
Potential catalysts for the Russell 2000 index
On the positive side, these tariffs may not remain in place long since Trump wants to use them as a negotiation tactic. Trump simply wants more concessions from Mexico and Canada on his key priorities like immigration.
He will likely not want to maintain these tariffs for long since they will have an impact on the stock market, which he watches closely.
The other positive is that the ongoing earnings season has been relatively strong, a trend that may continue. According to FactSet, 36% of all companies in the S&P 500 index have published their earnings.
77% of them have released a positive EPS surprise, while 63% have published a positive revenue surpise. The blended earnings growth rate for the index is about 13.2%, the highest earnings growth rate since Q4’21.
The IWM ETF will also react to corporate earnings from big US companies. Palantir Technologies will publish its fourth-quarter numbers on Monday. Other top firms to watch this week include Google, Merck, Clorox, Amazon, and Novo Nordisk.
These companies are not part of the Russell 2000 index, but they strongly impact all major indices in the US.
The other potential catalyst for the IWM ETF is that US equities often crash on Monday and then rebound during the week as investors embrace the new normal. In most cases, stocks have a positive end of the week when they drop on Monday.
Further, American stocks often rebound after going through a big drop. For example, they rebounded after the dot com bubble, Global Financial Crisis (GFC), and the Covid-19 shock.
Russell 2000 ETF: IWM analysis
The daily chart shows that the IWM ETF peaked at $244.30 in December and then dropped to $225 on Friday. The futures market point to a Monday open of $221.60.
It has moved below the 50-day moving average and is between the ascending channel. This channel is widening, a sign that it is a falling wedge pattern, a popular bearish sign. Therefore, the fund will likely go through some volatility and then resume the uptrend as the trade war tensions fade.
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