IWM short interest is elevated, and margin debt is down from January’s record. Amidst this, there is tariff uncertainty when it comes to fundamentals, likely forcing small-cap traders to put more weight on technicals.

IWM (iShares Russell 2000 ETF) shorts got active in April, with short interest jumping 28.2 percent to 106.8 million shares; in fact, through mid-month, short interest was up 28.9 percent from March’s level. In the second half of April, short interest edged lower 0.6 percent period-over-period. These are elevated levels of bearishness (Chart 1). The mid-April count of 107.4 million was the highest since end-August 2022.

Shorts have been adding since the end of January this year when short interest languished at 77.6 million, which was the lowest since end-February 2020. They nailed the trade as the ETF/Russell 2000, having peaked last November, was on the verge of rolling over. By 9 April, the small cap index was down 29.7 percent from last November’s all-time high.

The Russell 2000 bottomed on 9 April at 1733, having posted a new high of 2466 on 25 November last year, edging past the prior high of 2459 from November 2021. Early April, small-cap bulls succeeded in defending crucial support at 1700, which goes back to August 2018.

For nearly two years through December 2023 the Russell 2000 was rangebound between 1700 and 1900 before breaking out (Chart 2). From last month’s low, small-cap bulls once again experienced a strong rally, up 22 percent through 2115 ticked intraday on 16 May.

The significance of 2100 goes back to January 2021. Most recently, the horizontal support was breached two and a half months ago, in early March. Just above 2100 also lies trendline resistance from last November’s record. In the last 10 trading sessions, the Russell 2000 crossed 2100 five times, with a close above in four. In the end, the resistance held, as the index finished last week 3.5 percent lower to 2040.

As things stand, odds favor the index continues lower. The 50-day lies at 1991.

Later today, we will learn how IWM shorts behaved as of mid-May. By then, the rally that began early last month was beginning to lose steam. If they stayed put in their bearish outlook despite the six-week rally, that would demonstrate their conviction level.

Technicals aside, there is not a whole lot to point to on fundamentals either. The ongoing uncertainty emanating from President Donald Trump’s tariff policy is making it difficult for businesses to plan. The NFIB (National Federation of Independent Business) survey says as much. In April, its optimism index dropped 1.6 points month-over-month to 95.8. This followed four consecutive 100-plus readings from November to February.

At the sub-index level, plans for capital expenditure and hiring remain subdued. In April, small-business capex plans fell three points m/m to 18, while hiring plans rose a point to 13. Particularly as relates to capex, April’s count matched the low reached five years ago in the midst of Covid-19 uncertainty (Chart 3).

In this environment, it becomes increasingly difficult to go fully risk-on and take on leverage to do so.

Small-caps are one of the ways investors use to express their tolerance for risk-on. And, at 0.984 going back to January 1997, FINRA margin debt has a very tight correlation with the Russell 2000 (Chart 4).

In April, margin debt fell $29.8 billion m/m to $850.6 billion – a six-month low. Earlier in January, margin debt posted a fresh high of $937.3 billion, edging past the prior high of $935.9 billion from October 2021. Back then, the Russell 2000 peaked in November that year. This time around, the small cap index peaked last November, and margin debt two months after that.

Time will tell if the unwinding in both margin debt and the Russell 2000 witnessed in the last several months has run its course or there is more to come. With fundamentals shrouded in uncertainty, technicals are likely to decide the direction – at least near- to mid-term.

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