The iShares Russell 2000 ETF (IWM) crashed hard after the Federal Reserve delivered a highly hawkish interest rate decision. It slumped by over 3%, reaching a low of $218, its lowest level since November 5. It has dropped by almost 10% from the highest level this year, meaning that it is nearing a short-term correction.
Rotation from bonds delayed
The IWM ETF has plunged after the Federal Reserve delivered a highly hawkish interest rate decision on Wednesday.
On the positive side, the bank decided to cut interest rates by 0.25%, bringing the year-to-date cuts to 1%. However, the Fed also hinted that rates will not fall as fast as what analysts were expecting.
Instead, the dot plot hinted that the bank will cut rates two times in 2024. In his press conference, Jerome Powell noted that the US was doing well, with the labor market being highly strong.
Powell’s key concern is that Donald Trump’s policies will have an impact on inflation and economic growth. Trump has pledged to hike tariffs, a move that will lead to more inflation in the long term.
The hawkish Fed decision had a big impact on the stock market as the Dow Jones, Nasdaq 100, and S&P 500 indices fell by more than 2%
One reason for this is that American bond yields have continued to rise this week. This means that the much-anticipated rotation from bonds and money market funds to stocks will take longer. Recent data showed that the total assets in money market funds stood at over $6.77 trillion last week.
The general view is that investors will move from bonds to stocks when interest rates fall and returns in the bond market fades.
The Russell 2000 index also dropped because most of its companies are small and unprofitable, unlike other indices like the S&P 500 and Dow Jones. Historically, these smaller companies underperform the market when rates are high because they have little cash in their balance sheet.
On the other hand, companies like Apple, Berkshire Hathaway, and Microsoft make money when rates are high in the form of interest income.
Also, there are concerns that the American economy will underperform next year because of Trump’s policies. These companies tend to be highly exposed to the American economy.
Top gainers and laggards in the IWM ETF
IWM ETF companies are often highly volatile, with some surging by over 1,000% and others falling by almost 100%.
Mondee Holdings, a company that provides travel technology solutions, was the worst performer as it crashed by 98% this year. It was followed by Canoo, a company that is building electric vehicles. Canoo stock has fallen by 97% this year and has higher odds of filing for bankruptcy.
The other notable laggard in the IWM ETF is Luminar Technologies, a company that is working on Lidar solutions for the automobile industry. Virgin Galactic, Chegg, Marketwise, iRobot, Sage Therapeutics, and B. Riley were other notable laggards.
On the other hand, companies like Sezzle, Rigetti Computing, SoundHound, Root, Intuitive Machines, Core Scientific, and CleanSpark were some of the best performers.
Russell 2000 ETF analysis
IWM stock by TradingView
The daily chart shows that the IWM ETF has been in a strong bullish trend in the past few months. It recently jumped to a record high of $245 as the bull market intensified.
The ETF reversed after it formed a small double-top chart pattern, a popular bearish sign. It has also moved slightly below the 50-day and 100-day Exponential Moving Averages (EMA).
The MACD and the Relative Strength Index (RSI) have all pointed downwards. Most importantly, the fund has formed a broadening wedge pattern, a sign that it may go through a deeper retreat in 2025. This is in line with my last S&P 500 index forecast.
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