Fund flows indicate investors rushed to buy the dip on small-caps in October
The historically unpleasant month of October is over for investors, having left in its wake quite a few freshly broken levels of former technical support for the major equity benchmarks. And in surveying the damage, perhaps no moving average was treated with greater disrespect than the 200-day trendline on the iShares Russell 2000 ETF (IWM), as that exchange-traded fund (ETF) ended the month with a steep loss just shy of 11%. That double-digit percentage drop compares none too favorably to a slimmed-down 6.9% October decline for IWM's big-cap counterpart, the SPDR S&P 500 ETF Trust (SPY), and the 8.6% monthly deficit registered by the tech-focused Invesco QQQ Trust (QQQ).
As shown on the accompanying chart, IWM found crucial support at its 200-day moving average during the February stock market sell-off, and again in early April. However, after a three-day balancing act above this trendline early in the month, the small-cap tracker opened below its 200-day on Oct. 10, and never looked back. Just one day later, IWM went on to tumble through its 320-day moving average -- an often-overlooked trendline whose value we've recently extolled here as a critical level of "backup support" when the widely followed 200-day is broken.
Again, the comparisons to SPY and QQQ here are markedly unfavorable, as those two equity index trackers finished last week well above their respective 320-day moving averages, and QQQ at least is within arm's reach of its 200-day. But even the most cursory, high-level review of investor sentiment here is instructive, as far as explaining the comparatively extreme punishment meted out to IWM last month relative to its broad-market ETF counterparts.
During the month of October -- which was characterized nearly from start to finish by heightened stock market volatility and multiple steep daily sell-offs -- SPY registered nearly $2.91 billion in net outflows, according to etf.com data. Tech investors were less panicky, but still a bit jittery, as a net $105.92 million flowed out of QQQ. But in the case of IWM, the small-cap fund netted inflows of $740.30 million in October, as investors showed up in droves to "buy the dip" for small caps in a way they simply didn't for big-caps and tech stocks.
More broadly, while net outflows for SPY in 2018 totaled $21.12 billion through the end of October, QQQ had collected net inflows of $4.74 billion, and IWM had netted inflows of $3.05 billion. To put those numbers in perspective, QQQ's year-to-date inflows represent about 7.2% of its $66.19 billion in assets under management (AUM), while IWM's inflows this year account for 6.8% of its $44.89 billion AUM -- so investors have shown roughly equal affinity for tech stocks and small caps, while giving big-cap equities the cold shoulder. However, while QQQ still sports a 2018 gain of 8.7% following the recent bout of broad-market carnage, IWM investors have been rewarded with a year-to-date return that's less than 1 percentage point above breakeven.
So while it's plain to see why IWM was punished more harshly than its peers in this latest round of selling, it's worth pointing out that the fund still has several layers of support in place to stem further bleeding, should volatility continue to haunt equity markets in the weeks ahead. Beyond the 200-day, look at the significance of the 80-week moving average for IWM, as our Senior V.P. of Research Todd Salamone recently advised with regards to the S&P. And perhaps most crucially, note the highlighted support around the $145 level for IWM. After marking a high in July 2017, this area has caught several lows for IWM over the past year, and would be a natural place for any further panic selling to exhaust itself as the incorrigible small-cap dip buyers step in.
Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, November 4.