VirtualBacon
Crypto Investor & Educator, Macro Analysis
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
A suspected crash and liquidity squeeze make small-cap longs unattractive initially. x.comÂ
A seasonal bottom ahead of maximum seasonal bullishness favors US small caps now. Stock Traders Almanac says the Russell 2000 is down 11% from its August 14 high and expects small caps to bottom in mid-to-late October before rallying into year-end. 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
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 drawing a rotation that signals the market is quietly going more risk-on. When the Nasdaq and S&P 500 printed their first red daily candles after 14 straight green days, the Russell 2000 still closed higher, showing money moving from large caps into small caps rather than leaving the market. 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
US small caps look vulnerable heading deeper into September because they have less resilience to rate hikes, and bearish September sentiment adds pressure. x.comÂ
US small caps look as bullish as they possibly could after an insanely clean breakout and retest of a five-year accumulation range, a setup that can run for years, not months. As the highest-risk equity index, the Russell 2000 is a barometer for high-risk assets broadly, and US liquidity is breaking out from its lows at the same time. This is not a bear market; everything should go a lot higher this year. 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