Bearish On The Market? Russell 2000 Better Short Than S&P 500

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 |  About: iShares Russell 2000 ETF (IWM)
by: Nicholas Pardini

Summary

Our outlook remains bearish on the US market.

Overvaluation of Russell is more extreme than S&P 500.

Composition of Russell 2000 companies are more sensitive to business cycle than S&P.

As we have continued to warn investors, the risk-reward profile is terrible for US stocks as we continue to face a bubble environment. Severe signs of bubble behavior have continued to extend in 2014. These can be seen through IPO activity, extreme uses of leverage across financial assets, declining market breadth, and all time high optimism linked solely to non-fundamental factors such as quantitative easing.

However, when it comes to the most optimal way to short the market, the Russell 2000 (NYSEARCA:IWM) seems to have the most downside. Procyclicality within the small cap sector and the composition of the Russell is weighted more cyclical sectors such as technology and consumer discretionary goods. After factoring in companies with negative earnings within the index, the Russell has a P/E of 100.5. This is four times higher than its historical average of 25.

As seen in the video above, technicals are setting up bearishly as well. Technical momentum on indicators such as the MAC-D and stochastics is already negative, and the Russell is threatening a major support line of 1100. A daily close below that level leaves the next support points at 1050 and 1000, respectively.

Overall, our outlook is negative on the Russell. Technical breakdowns, overvaluation, diminishing returns from the Fed, and the cyclical slowdown of the US economy are the perfect storm for a crash in small caps.

Disclosure: I am short IWM, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.