DON7SPY
Industrial Engineer, MBA Finance, Data/Supply-Chain Background, Options 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
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
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 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 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
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- 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
Bond pressure should weigh on US small caps. IWM is also losing its long-term trend line. x.comÂ
Falling yields could drive a Russell 2000 rally, making US small caps look very attractive into next week. Touching and bouncing off the 200-day SMA is normal for the index, and a break above 285 would make things very interesting. Hot yields are the swing factor: if they fall, adding exposure makes sense. 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