IWM - Russell 2000 ETF - ETF Profile

The iShares Russell 2000 ETF seeks to track the investment results of an index composed of small-capitalization U.S. equities. With this ETF you get exposure to small public U.S. companies, access to 2000 small-cap domestic stocks in a single fund and strong diversification.

The Russell 2000 has been the weakest index over the last several weeks and is now down -5.4% from its high. The index is about to test critical support at 1,340 and a breakdown could see a drop all the way to 1,150. That is $134 and $115 on the ETF.

The small caps rallied significantly post election on expectations for a strong pro business agenda. With that agenda in serious trouble, investors may be taking chips off the table. With the broader market starting to break down there is little sympathetic support for the small caps. They normally lead both up and down and it appears they are currently leading down.

We are in the typically weak Aug/Sep period. Regardless of what happens over the next three weeks, the last three weeks of September have extreme risk for the market. Lawmakers have to pass a highly volatile budget and both sides have said there is no way they will vote for it in the current form. Even if they do vote to pass a budget they still have to pass an increase to the debt ceiling. Democrats have said they would only vote for a clean bill and republicans have said they will not vote for a bill that does not have some spending curbs.

Goldman Sachs said on Friday there is a 50% chance of a government shutdown. The last time that happened the S&P lost 246 points in only 11 days. While there may not be a repeat of that event, there would be a sharp decline before and during the battle in Congress. The more heated it gets, the farther the market will fall.

I am recommending we add some insurance in the form of a short term put on the Russell ETF. We need to protect ourselves through early October so I am recommending the November strike.

Buy Nov $132 put, currently $3.43, no initial stop loss.