Financial markets have been extremely volatile in recent weeks, dragging small cap stocks into a bear market. With all the talk of market weakness, this is the first time since 2011 that iShares Russell 2000  (IWM) has fallen 20% lower from its high.

The Russell 2000 index has fallen by more than 20% twice since the financial crisis. The last time, as was mentioned above, was in 2011, during the Euro Area crisis. The total move lower at that time was as much as 30% before reversing higher.

The time before 2011 when IWM fell by more than 20% off of its highs was in late 2007, the beginning on the financial crisis. The Russell 2000 index went on to fall a total of 60% from its highs before the turnaround came about.

What can be seen from this price action is that profound weakness in the Russell 2000 index is a very negative sign for overall markets. Small cap stocks may not be as exposed to international trade, or even the price of oil, but elevated valuations created by U.S. monetary stimulus is finally fading. There are a number of fundamental reasons to be cautious of equities currently, with the Russell 2000 index entering a bear market accounting for another.


Data provided by Stockcharts.com

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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