Small-Cap Stocks Have Gotten Crushed. The Next Few Days Are Crucial. -- Barrons.com

Dow Jones2022-09-03
Jacob Sonenshine 

Small-capitalization stocks have gotten hit particularly hard in the late-summer selloff. They can't afford to slip any further.

The iShares Russell 2000 Exchange-Traded Fund $(IWM)$, which tracks an index of smaller stocks, has dropped abut 9% from its summer peak in mid August. That's worse than the large-cap S&P 500's drop of nearly 7%.

Federal Reserve Chairman Jerome Powell's comments at the annual Jackson Hole Symposium last Friday is behind the recent declines. He said the Fed intends to lift interest rates rather aggressively to combat still-high inflation, as the central bank seems willing to accept some destruction of economic demand. That hits small-cap stocks harder because their earnings are more sensitive to changes in economic demand, and they have slightly less access to capital than larger, more-established companies.

Now, the small-cap ETF is flirting with danger territory. At about $183 a share, it has fallen below the key area of around $190. There, buyers had stepped in earlier in the summer to prop the price up. In recent weeks, however, the fund broke below $190 -- and buyers were absent. It now looks like there are higher odds that the ETF can keep dropping.

That makes the next few trading days crucial. The ETF is currently trading almost exactly at its 50-day moving average of $183. If it breaks below that average, that would show that market participants are not confident enough in these stocks to buy them at prices consistent with an average that reflects higher prices. If it slips below there, the ETF's shares could fall to $175, the next level of support, wrote strategists at Macro Risk Advisors.

The good news: There seems to be some support around the 50-day moving average. This Friday, the ETF was about flat after the August jobs report was cooler than expected. That means the rate of inflation has a shot to keep trending lower, which would eventually compel the Fed to slow down the pace of rate hikes.

Any Monday follow through to Friday's rally will be important. A U-turn for small-caps to start next week won't make them look good at all.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

 

$(END)$ Dow Jones Newswires

September 02, 2022 13:42 ET (17:42 GMT)

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