Action-starved traders look to small-cap stocks for the next big move
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- S&P 500 trading has been defined by buying dips and selling rips all summer, with the VIX at recent lows and a slowdown in speculative tech call-buying that had been driving sharp swings.
- Russell 2000 has climbed 20% year-to-date, outpacing the Nasdaq-100's 18% gain, as the small-cap index steadily pushes higher while mega-cap tech runs in place.
- A trader spent nearly $20 million on a strangle in the IWM ETF, buying 15,000 December 270-strike puts for $11 million and 15,000 December 335-strike calls for $7 million, positioning for a 14% rally or 11% drop by December 18.
- Eric Kuby, CIO of North Star Investment Management, said "the bloom is off the rose" for mega-cap tech and that money is rotating toward small caps, where some forecasts project earnings growth above 20%.
- Russell 2000's 21% rally in the second quarter was the eighth-biggest quarterly move in its history and the strongest since 2020, according to Strategas Research Partners.
- Regional banks in the KRE ETF have gained 15% year-to-date, compared with just a 1% move in the broader S&P 500 financial sector, despite rising Treasury yields that typically weigh on small caps.
Why it matters: A nearly $20 million options bet in the IWM ETF, one of the biggest single trades in the market, signals that institutional money is hedging for a decisive small-cap breakout — up 14% or down 11% — by year-end. With mega-cap tech stalling and small caps already up 20% YTD, the rotation from Nasdaq leaders to Russell 2000 laggards is becoming a trade large enough for hedge funds to position around.
