The Russell 2000 index spectacular sell-off took a breather on Thursday as the US dollar index pulled back. It rose to $1,832 in the futures market, which was slightly above this week’s low of $1,782. The price is about 10% below the highest point in August.
Small-cap stocks crash
American equities have pulled back recently amid heightened concerns about the Federal Reserve. As we wrote in this article, Jerome Powell reiterated that the bank will continue hiking interest rates in the upcoming meetings. He will likely maintain this tone in a speech on Thursday.
Other Fed officials have also argued that higher interest rates are necessary. On Wednesday, Lael Brainard, Fed’s Vice Chair, said that a combination of high rates and quantitative tightening will go on for a while. The Fed hopes that inflation will move back to between 2% and 3%.
Russell 100 and other American indices like the Dow Jones and S&P 500 have retreated because of the Fed’s view of the economy. This view has led to a sharp gain of the US dollar index, which soared to a 2-decade high this week.
A strong US dollar tends to be bearish on American companies, especially those with exposure internationally. In the most recent quarter, companies attributed losses worth billions of dollars to a strong USD.
At the same time, the closely watched fear and greed index has moved from the greed zone of 60 to a fear level of 39. Historically, indices tend to retreat when investors are fearful about current conditions.
Meanwhile, elevated inflation is having an impact on the earnings of Russell 2000 constituents. According to FactSet, the aggregated earnings growth of American companies dropped to the lowest level since Q4 of 2020.
The worst performers in the Russell index in the past 30 days are companies like Faraday Future, Cyxtera, Smartrent, Boxed, and Beyond Meat.
Russell 2000 forecast
The small-cap Russell 2000 index has been in a strong bearish trend in the past two weeks as the US dollar index surged to a two-decade high. It has managed to move below the important support level at $1,920, which was the highest point on June 7. The 25-day and 50-day exponential moving averages have made a bearish crossover while the awesome oscillator has moved below the neutral point.
Therefore, the index will likely maintain its bearish trend ahead of this month’s Fed decision. If this happens, the next reference level to watch will be at $1,702, which was the lowest point on May 12.
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