Yimin X
Founder of YX Insights, Ex-FX/Rates Market Maker
Small- and mid-cap earnings growth does not support buying the group. A CNBC guest cited earnings as a catalyst for purchasing IWM, but the EPS growth is not coming from small- or mid-cap companies. x.com 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
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 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
High interest rates are hurting US small caps. The Russell 2000 is retesting its May lows even while the Dow is up and the S&P 500 is only slightly lower. 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
The Russell 2000's cheapest P/E among the major indices does not make small caps a buy. Once growth and earnings revisions are factored in, it looks like the least attractive index of the group. x.comÂ
Elevated 10-year Treasury yields, the dollar and crude oil keep the Russell 2000 from working. Even IWM's top 500 companies are awful. x.comÂ
Small caps should keep outperforming because the companies receiving large caps' heavy capex spending are reaping the benefits, while large caps get repriced to reality. The Russell 2000 has been exceptionally strong against the S&P 500 and Nasdaq 100. 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