Russell, Your Looks Have Become A Problem – IWM

by riskreversal October 28, 2016 3:13 pm • Trade Ideas

The S&P 500 (SPX) took a brief hit this afternoon after the FBI announced to Congress they are reviewing new emails recovered from then Secretary Clinton’s private email server. After the quick 1% drop, the SPX is now basically flat on the session. The SPX, while up 4% on the year, is now 3% from its all time highs made this summer, and from a technical perspective, below the uptrend that had been in place from the February lows, which may be a cause for concern as there is little support below for another 50 to 70 points.  That said, the index once again bounced off of 2120 support:

SPX 1yr chart from Bloomberg
SPX 1yr chart from Bloomberg
While I am not a technician, despite playing one on tv from time to time, I suspect pros would agree that the SPX above 2100 looks ok.

But, small cap stocks, measured by the IWM, the etf that tracks the Russell 2000, might be worth keeping an eye on, as weakness among this group could portend future weakness for its large cap brethren. The IWM/RTY which is still up 4.4% on the year is down about 6% from its all time highs made in late September (2x the decline of the SPX from its highs). To my eye (and that of my Fast Money pal @GuyAdami who brought the relative weakness to my attention yesterday) the IWM looks like a slow moving trainwreck, below the uptrend from its 52 week lows made in February, and below $120, a level that served as important technical resistance until its breakout to new highs in July, and then support on a few occasions since:

IWM 1yr chart from Bloomberg
IWM 1yr chart from Bloomberg
For those looking for portfolio protection between now and the election and the week beyond which might have its share of excitement if Trump has his way, the IWM might offer the best bang for your hedging buck given the relative under-performance from the highs.

If I were looking to make an outright bearish bet, or possibly considering protection I might consider a short dated put spread in the IWM:

IWM ($118) Buy Nov 118 / 108 Put Spread for $2

-Buy 1 Nov18th 118 put for 2.35

-Sell 1 Nov18th 108 put at 35 cents.

Break-even on Nov18th expiration:

Profits: up to 8 between 116 and 108, max gain at 108 or lower

Losses: up to 2 between 116 and 118, max loss of 2 above 118

Rationale:  This trade risks less than 2% of the stock price, offers nearly 7% of gains or downside protection back towards an important long term technical support level.