GrowthTurtle
Data Science PhD & IEEE Fellow, Ex-Two Sigma
The whole market, including small caps, may be bottoming as risk moves out the curve, though confidence is limited. Yields are dropping and the dollar a bit too; real rates are still high but that is fine if they keep falling. The tell is that the Russell 2000 is still up, showing the crowd wants risk. 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
US small caps' first pullback since their historic, volume-supported breakout this year is a huge opportunity, because institutions are selling nothing and are actively accumulating around the $294 level. Weekly and daily charts show textbook accumulation on every failed new high, so the big picture holds even as short-term upside stalls. 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
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
Improving breadth supports a possible IWM reversal. IWM may form a higher low today, but must first reclaim its 20-day EMA. Net new lows are easing, NYSE stocks above their 40-day average rose to 34%, and LS breadth's bear count is near the -300s from -450. A -450 reading has marked selling exhaustion. In bull-cycle pullbacks like this one, breadth rebounds tend to precede continuation; in bear markets, another leg lower tends to follow. The next move is uncertain. 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
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