The Russell 2000 index continued its downward trend this week, erasing all the gains it made this year. It plunged to $1,720, the lowest level since May 4th. It has crashed by more than 14% from the highest level this year.

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Small cap stocks under pressure

The Russell 2000 index (IWM) is one of the biggest indices in the United States. It tracks the biggest 2,000 small-cap companies in the country. It is often seen as the best representative of the economy.

The index has struggled this year as the Federal Reserve has maintained an extremely hawkish tone. It has pushed interest rates to the highest level in more than two decades and pointed to more hikes in the coming months.

Fed hikes have had an impact across all assets. Long-term bond yields have surged while the US dollar strength has risen to the highest point in months. Riskier assets like cryptocurrencies have struggled since short-term money market funds have rose.

The Russell 2000 index has underperformed its bigger counterparts for two main reasons. First, indices like the Nasdaq 100 and S&P 500 have been helped by big technology companies like Apple, Microsoft, and Nvidia. These firms are now known as the Magnificent 7.

Second, unlike big companies, many small-cap stocks, especially in the biotech industry, are mostly unprofitable. They also have limited cash in their balance sheets. Therefore, these firms are having to pay more money in interest. They are also having difficulties raising capital from banks, which are now improving their balance sheets.

In contrast, big companies like Meta Platforms, Apple, and Microsoft are making hundreds of millions every quarter in interest. Russell 2000 has also seen a major reversal as Bitcoin mining companies like Marathon Digital and Riot Platforms have pulled back recently.

All this explains why the ratio of the Nasdaq 100 relative to the Russell 2000 has jumped to the highest level in years.

Russell 2000 index forecast

The daily chart shows that the Russel 2000 index has been in a strong bearish trend in the past few months. Along the way, it has crashed below the 100-day and 50-day moving averages. The two averages have made a bearish crossover pattern. It is also approaching the important support at $1,696, the lowest point in March.

Therefore, the outlook for the Russell 2000 index is bearish, with the next level to watch being at $1,695. A break below that level will see it crash to the next support level at $1,600.

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