Russell 2000: Looking Past the Short-term VolatilityCME: Micro E-Mini Russell 2000 Index Futures ( CME_MINI:M2K1! )
On Saturday, May 3rd, Warren Buffett took the center stage of the Berkshire Hathaway annual shareholder meeting. “What has happened in the last 30, 45 days … is really nothing,” declared the “Oracle of Omaha”.
Buffett brushed off recent stock market volatility that has rattled investors over the past weeks. “This has not been a dramatic bear market or anything of the sort,” he said.
In April, U.S. stock market took a deep dive after the start of Reciprocal Tariff against all U.S. trading partners. A few days later, we witnessed spectacular rally with a record daily gain, as a 90-day tariff pause was announced. On May 2nd, the S&P 500 completed a 9-day winning streak, the longest in 20 years.
After a month-long rollercoaster ride, the U.S. stock market is back to where it started. If an investor bought stocks in the beginning of April and then slept for the whole month, he wakes up today and may not even notice any changes in his portfolio.
Sunny Days ahead after the Storm
I concur with Buffet’s assessment that the U.S. economy is fundamentally strong. The supply chain disruptions are painful and will lead to product shortage, higher prices and layoffs in affected industries. However, trade conflicts will be resolved in a few months. The U.S. will be in a strengthening position, making its economy more sustainable.
The U.S. economy contracted 0.3% in Q1 2025, the first negative reading since 2022, according to the Commerce Department. However, the underlying data is much better if you look past the headline.
The formula: GDP = C + I + G + (X - M), where:
• C is consumer spending; I is investment by private business
• G is government spending; (X-M) is the net of exports minus imports
The key driver of the negative GDP is Imports. US buyers front-run the tariffs with massive orders, resulting in a 41.3% increase in imports. We also see a 21.9% gain in investment, primarily the result of US businesses building up inventory with imported goods.
• Imports and Investment contribute -4.83% and +3.6% to Q1 GDP, respectively. Both are one-time events and should not be taken as a long-term trend.
• Consumer spending grew 1.8% in Q1, contributing to 1.21% of GDP. Government spending contracted 1.4% in Q1, contributing to -0.25% of GDP.
Real Story: Q1 constant dollar GDP is +3.5%. By using a price deflator of 3.7%, the government reports a -0.3% “Real GDP at seasonally adjusted annual rates.”
Separately, the Bureau of Labor Statistics (“BLS”) reported that total nonfarm payroll employment increased by 177,000 in April, beating market expectations. The April unemployment rate was 4.2%, in line with expectations.
The above data supports my assessment of a solid U.S. economy. Once we walk past the tariff fear, the stock market will likely resume its growth.
Small Firms May Benefit More from New Trade Policies
A global supply chain helps corporate giants source from the most efficient and lowest cost suppliers. Small businesses may not be so lucky. Take the US textile industry as an example, the BLS data shows that 80% of domestic jobs have been lost since 2000.
The "de minimis" exemption is an import loophole that allows overseas packages under $800 to come into the U.S. duty-free. According to BLS data, e-commerce giants like Amazon, Shein and Temu source 80-90% of their products from overseas.
Closing the "de minimis" loophole and enacting fairer trade deals will help domestic manufacturers. By shielding from low-cost import dumping, a revitalized US manufacturing industry may not be far fetching.
Of the four major US market index, Russell 2000 performed the worst, flat in the last twelve months. Based on my analysis above, the Small Cap Russell index may have a better growth outlook compared to blue-chip indices.
Trade Setup with CME Micro E-Mini Russell 2000 Index Futures
Traders who take a bullish view in Small Cap could buy the Micro Russell Futures (M2K).
M2K contracts have a notional value of $5 times the index value. With Friday settlement price of $2042.70, each September contract (M2KU5) has a notional value of $10,213.5. Buying or selling one contract requires an initial margin of $932 at the time of writing.
The reason for selecting the September contract rather than the more liquid June contract is the time it takes to negotiate trade deals. While some trading partners may reach agreement within the 90-day window, others may not.
Micro Russell futures (M2K, $5) contracts tap into the deep liquidity of E-Mini Russell futures contracts (RTY, $50). As of last Friday, RTY has an open interest (OI) of 457,283 contracts, while the OI for M2K is 41,563, according to data from CME Group.
The risk of long Russell futures is a decline in the index. To hedge against the downside risk, a trader could set up a stop-loss in his buy order.
Hypothetically, a trader enters a buy order of M2KU5 at $2050 with a stoploss at $1950.
• If the Russell goes up 10% to 2,255, the trade will gain $1,025 (= (2255-2050) * 5). The theoretical return is 110% (= 1025/932). This is 10 times bigger than the gain in the underlying index, thanks to the leverage built into the futures contracts
• If the Russell falls 10% to 1,845, the maximum loss with be $500 (= (2050-1950) * 5). This is less than the initial margin of $932 and the trader will not face a margin call. The loss is limited even if your view is incorrect, thanks to the stoploss feature
Happy Trading.
Disclaimers
*Trade ideas cited above are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management under the market scenarios being discussed. They shall not be construed as investment recommendations or advice. Nor are they used to promote any specific products, or services.
CME Real-time Market Data help identify trading set-ups and express my market views. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com
