Oh Come On!
Investor, Venture Capital Background
US small caps look overextended: the Russell 2000 is only 3% off its highs and is full of weak companies that were spared the selloff because they aren't in the Nasdaq 100. Single stocks are whipping around while the S&P 500 stays muted, and the S&P could be 15% lower without anyone thinking it unwarranted. x.comÂ
US small caps are far more economically vulnerable than the Nasdaq 100 or S&P 500, yet the Russell 2000 has gone vertical though the Iran war is not over and nothing has changed. Large-cap Nasdaq companies can buy back stock, cut staff and trim stock compensation, while small caps as a group earn less than they did six years ago. x.comÂ
US small caps look exhausted on the weekly chart, with a rising wedge, a spinning top and bearish RSI divergence; a break below 291 would target 285, 278 and 270. A Fed stuck at 3.75% keeps refinancing costs high for unprofitable Russell 2000 names, 43 names left the index at reconstitution, and banks are a bigger slice as the yield curve nears a 12-month tight. A move above 300 would invalidate the view. x.comÂ
US small caps are being used as a source of funds rather than trading as a rate-sensitive proxy, which leaves them vulnerable. Money is rotating out of the S&P 500 into equal-weight and NYSE names and from AI into defensives, while the Nasdaq 100 was hammered and is now bouncing. Rising yields are the bigger threat to AI bulls, yet Warsh is a dove in hawk's clothing. x.comÂ
Falling rates and buying in financials, consumer discretionary and Home Depot make US small caps a very good buy here with high probability. The drawdown exceeds 11%, as it did at the start of the Iran war, and daily RSI and MACD are at similar bottoms. x.comÂ
US small caps are a classic investment trap because IWM earnings per share have consistently disappointed while S&P 500 earnings per share have consistently over-delivered. Investors mistake smaller companies for greater upside. x.comÂ
Small caps are more sensitive to higher rates, so they will suffer and underperform as yields climb, and today's move is just an oversold bounce. Fed fund futures are at 3.75%, and other Treasury yields are already higher, so the market is effectively there already. Another rate hike may not make much difference on its own, but not every stock can handle this level of rates. x.comÂ
Banks and XLF look to have bottomed this past week, supporting a local bottom in US small caps. Stockspy1 noted that the Russell 2000 includes many regional banks, linking the banking-sector turn to IWM. x.comÂ
Bond pressure should weigh on US small caps. IWM is also losing its long-term trend line. x.comÂ
US small caps are set up for bigger, faster moves lower because the Russell 2000 has slipped below its options flip level. At $285.58, IWM sits just under the $286.25 flip, where big option desks switch from cushioning moves to selling into selling, with $280 as the put floor and $293 as the call ceiling. SPY and QQQ remain calm; IWM is the one that flipped. Options price a $6.35 weekly move versus recent $4.87 weeks, so protection is expensive. x.comÂ
US small caps are now one of the strongest indexes, trending up almost steadily since April's low with shallower pullbacks than the Nasdaq, and the rotation into small-cap value is not over. The trend stays bullish while the index holds its 21-day EMA and the 296 gap, with gamma-structure targets at 305 and then 310-315. x.comÂ
Favoring the Nasdaq 100 over small caps remains right because the digital economy has changed market structure, and AI is accelerating that shift. Fading QQQ against IWM has been the widowmaker trade in US equities since the iPhone launch. The Magnificent 7 are breaking out to new all-time highs as AI enters a consumer-agent stage, while small caps suffer from fears over rates and oil. Breadth warnings are everywhere, but the structure has changed: adapt or die. x.comÂ
