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Rising interest rates could collapse a little high, here’s the reason

This article was written exclusively for Investing.com

The small company has been struggling lately and has not reached highs like their counterparts with large companies. Based on some recent stock options, which indicate lower prices on the horizon, the problems could only begin. This makes the iShares Russell 2000 ETF (NYSE 🙂 vulnerable to a downturn of up to 8% from its current price of around $ 228.

This positive outlook for small businesses could be due to fears that inflation will rise, causing margins to fall, especially if all costs have not been passed on to consumers. Bond yields are expected to rise significantly from now on. The first week of May could give them a spark with a slew of inflation-sensitive data to be released.

Higher interest rates

As the central bank intends to maintain a slow monetary policy and raise inflation, there is plenty of room for interest rates to rise. Technologies show bullish trends for 5, 7, 10 and 30 year growth. These patterns all look like bullish flags that are breaking out of their current trading channel. It could even lead to it breaking out of previous heights and heading for 2%.

10-year exchange rate in the United States

Higher inflation could narrow margins, especially for some of these smaller stocks that are more valuable in supply chains. Lower margins would suppress economic growth and reduce income margins in the smaller corporate sector.

Bet on the function in lower case

Option traders have been betting lower in recent trading rounds, indicating lower prices for smaller companies. On April 28, the open interest rate for June 18 increased IWM $ 227 stock options by approximately 8,300 contracts and were purchased for approximately $ 7.50. This indicates that the ETF will trade below $ 121 by mid-June. In addition, some bet on even more fall; On April 26, open interest rates rose to $ 215 in June for over 17,000 contracts and were purchased for approximately $ 4.80 per contract. This would indicate that IWM is trading at $ 110 during the term, which is an 8% decrease.

IWM technology now suggests that problems may also arise. There is a possible turn of the head and shoulders that has formed on the tablet. It may be too early to confirm the downturn, but it certainly needs to be closely monitored. Confirmation of a bearish trend was not obtained until the IWM fell below $ 207. While traders are not betting on such a sharp drop, it is certainly possible to test this support level again and would fit into the narrative discussed above.

No more inflation

If the central bank gets what it wants, ie. persistent inflation of 2% on average over time, it probably means that the yield on the long end of the career has only one way to go, the rise. Unless the Fed controls the yield curve, which seems unlikely, interest rates will have to rise from now on. This explains why the bond market is currently in a bullish tone for growth.

At the same time, higher inflation is likely to narrow the margins of some small businesses, especially if they are unable to pass on all these cost increases to their consumers. Overall, this could mean that the industry is ready for a price reduction, especially if the bond market’s opinion turns out to be correct.