On Monday, I will add to my short position in the small-cap Russell 2000 by buying more of the ProShares Short Russell 2000 ETF (RWM) for my Jubak Picks Portfolio. This buy will give me two positions in the ProShares Short Russell ETF. The first position, added to the portfolio on July 23, 2023 is up 0.08% as of the close on November 3.
Why go all in on shorting the Russell now?
The short-term reason is that the index is up 8.5% in the last week and the technical levels, with the 50-day moving average at 1776.45, make me believe that it will be difficult for the index to maintain what amounts to a new local high.
Second reason is more long-term. While I understand the market’s enthusiasm about growing evidence that the Federal Reserve will not raise interest rates at either its December 13 or January 31 meetings, I think that enthusiasm is misplaced. The recent run up in Treasury yields–and consequently in all bond yields–wasn’t a result of any policy action by the Fed, but was instead a reflection of an emerging global debt crisis that is still playing out everywhere from the U.S. commercial real estate market to developing country debt. All the evidence points to a classic end of credit cycle squeeze where lenders tighten their credit standards and lend less and borrowers have a harder time raising capital even if they can pay the higher costs of borrowing. This kind of credit squeeze is particularly painful for small companies that frequently have fewer lender relationships and less cash in reserve. Before the recent rally the Russell 2000 looked like it was headed for a breakdown. I think we’ll see the index challenge those levels again with a drop to 1700 (from 1761 today) or more likely to the 1650 level. After that, the trend in the index will depend on how slow the slowdown in the U.S. and global economies will be.
The ProShares Short Russell 2000 ETF (RWM) closed at $24.62, down another 2.65%.
