Bond Liquidation Wrecks Small Caps vs. S&P 500 — SkimNews
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- Russell 2000 lost its early-year lead in September, sliding from up 20% YTD at month-start to up just 14%, while the S&P 500 climbed to 20% YTD and the Nasdaq-100 rose 12%.
- iShares Russell 2000 ETF (IWM) shows a 0.51 correlation with the 20+ Year Treasury Bond ETF (TLT), compared to 0.29 with SPY and 0.1 with QQQ; last week the IWM-10-year note correlation touched a one-year high above 0.97.
- Schwab's Kevin Gordon said small caps have had a "more difficult time adjusting to the Fed's hawkish turn," noting their negative correlation to the 10-year Treasury yield is two times that of large caps.
- IWM options activity tilted heavily bearish Thursday, with traders likely buying 480,000 puts versus 371,000 calls, and roughly $100 million of the $322 million in premium traded going to puts versus $50 million on calls.
- SPY and QQQ options volume ran 40% above the 30-day average by midday Thursday, while IWM volume was almost double its 30-day average, and put open interest in IWM reached nearly 7 million contracts versus about 3 million in calls.
- The top-four most popular IWM trades by volume were all puts, with the 269-strike put expiring Oct. 16 requiring a 4% selloff to be profitable.
- Schwab's Gordon countered that forward earnings estimates for small caps remain solid, consistent with continued PMI improvement and stronger US growth data.
Why it matters: Small caps' outsized sensitivity to long-end yields has flipped their YTD leadership into a September lag, with options traders pricing in further downside — the popular Oct. 16 269-strike put needs a 4% drop to pay off, and $100 million of Thursday's IWM premium went to puts versus $50 million to calls, signaling real-money conviction the slide may not be over.
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