While the S&P 500 advances despite rising bond yields and higher oil prices, U.S. small caps are falling behind: the Russell 2000 dropped from a 20% year-to-date gain earlier this month to just 14%, versus 20% for the S&P 500 and 12% for the Nasdaq-100. Higher interest rates and falling bond prices are the main culprits, with the correlation between the IWM ETF and the TLT bond ETF at 0.51, while the correlation between small caps and the 10-year Treasury reached a one-year high above 0.97. IWM options volumes nearly doubled versus their 30-day average, with roughly 480,000 puts bought against 371,000 calls, and the four most popular trades were all puts. Kevin Gordon of the Schwab Center for Financial Research said further weakness could follow if rates keep rising, but noted that small-cap fundamentals remain solid, supported by improving PMIs and firm forward earnings estimates.
Source: Read the original article
