Large-cap stocks have managed to navigate recent market volatility, but small-cap equities are struggling significantly. The Russell 2000 index has declined more than 5% over the past month as yields on 10- and 30-year Treasurys climb to levels not seen since the early 2000s. The disparity is even more pronounced when compared to the tech-heavy Nasdaq-100, which has risen over 5% in the same period.
According to analysis from BTIG’s Jonathan Krinsky, the Russell 2000 is down approximately 16% relative to the Nasdaq-100. This dramatic divergence has pushed the ratio’s relative strength index (RSI) to 12.77, marking only the fourth time since 1985 that it has fallen below the 14 threshold. The previous instances occurred in July 2007, August 2011, and March 2020.
While this represents a historically rare signal, Krinsky cautions that an oversold condition does not automatically imply an imminent rebound. “In 2007 and 2011, the ratio continued to decline over the subsequent 10 to 30 days,” he noted. However, he also acknowledges that such extreme readings often signal potential contrarian opportunities.
The pressure on small-cap stocks stems from their heightened sensitivity to interest rate increases. Unlike larger corporations, smaller companies typically have more limited financial resources and depend heavily on borrowing for growth and operations. Rising rates make new loans more expensive and refinancing existing debt increasingly burdensome.
As investors seek safety amid the Treasury yield surge, they have flocked to technology and artificial intelligence-related stocks, further exacerbating the performance gap. If Treasury yields show signs of exhaustion and move meaningfully lower, it could provide significant relief for the Russell 2000.
In anticipation of a potential bounceback, Barclays has identified several small-cap stocks with strong prospects, including Ultra Clean Holdings, Penguin Solutions, and PTC Therapeutics.
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