Heisenberg
Stock Chartist, Long/Short Ideas
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 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
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 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
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
Bond pressure should weigh on US small caps. IWM is also losing its long-term trend line. 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
Betting against US small caps means fighting trend, valuations and smart money, all of which favor the bulls. x.comÂ
A suspected crash and liquidity squeeze make small-cap longs unattractive initially. x.comÂ