TJ
Stock/Options Trader, Volume at Support/Resistance, Publisher of Volume Stocks Newsletter
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
Small caps' easy-money era is over, Goldman Sachs says, as the Russell 2000 halved its AI infrastructure weighting from 15% to 7% after AI stocks drove 40% of its gains this year. Interest expense now eats 31% of Russell 2000 companies' EBITDA, the heaviest load in six years. The weekly chart shows a rising wedge, a spinning top at the trend line and bearish RSI divergence; a break of 291.42 targets 287.05, 277.62 and 270.36. 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
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
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
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
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
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
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
Bond pressure should weigh on US small caps. IWM is also losing its long-term trend line. x.comÂ
Small caps have the best chart of the three major US indexes, and money is flowing into the financials and biotech names the Russell 2000 is full of. The position was started on the post-FOMC flush and will be managed against the 9-day EMA, with the risk of exiting if Fed chair Warsh's press conference goes the wrong way. 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
