iShares Russell 2000 ETF (IWM): Pullback Risk Rising

With bearish options bets on the iShares Russell 2000 Index ETF (NYSE:IWM) plunging toward yearly lows, it might be time for the small cap fund to see a short-term sell-off.

That’s the message from the options experts at McMillan Analysis Corp., who today published a note that their computer generated dollar weighted Put-Call Ratio Sell Signal has been visually confirmed by IWM’s chart (see below):

IWM-put-call-sell

As you can see above, the put-call ratio (blue line) has absolutely remained at extremely low levels over the past couple of months, and is once again approaching its lowest point in over a year. In essence, this means that bullish options bets on a dollar basis are dwarfing those on the bearish side.

This sort of severe imbalance typically ends with a sharp turn in the other direction, and in IWM’s case, could mean a quick downturn in the short term.

For more on put-call ratio and its value as a contrarian indicator, check out McMillan’s explanation:

Put-call ratios are useful, sentiment-based, indicators. The put-call ratio is simply the volume of all puts that traded on a given day divided by the volume of calls that traded on that day. The ratio can be calculated for an individual stock, index, or futures underlying contract, or can be aggregated – for example, we often refer to the equity-only put-call ratio, which is the sum of all equity put options divided by all equity call options on any given day. Once the ratios are calculated, a moving average is generally used to smooth them out. We prefer the 21-day moving average for that purpose, although it is certainly acceptable to use moving averages of other lengths.

While a historically low put-call ratio is by no means a guarantee that an ETF will fall, it is a generally reliable tool for traders and investors to use to identify ETFs that are due for short-term pullbacks (or rallies, in cases where the ratio spikes suddenly). It pays to closely monitor IWM’s share price over the next several sessions as a result.

The iShares Russell 2000 Index ETF (NYSE:IWM) was trading at $141.69 per share on Friday afternoon, up $0.20 (+0.14%). Year-to-date, IWM has gained 5.07%, versus a 9.53% rise in the benchmark S&P 500 index during the same period.

IWM currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 37 ETFs in the Small Cap Blend ETFs category.