One of the most speculative corners of the US stock market is skyrocketing at an unprecedented pace since the outbreak, as traders compete to raise their bets on interest rate cuts and market risk appetite remains strong.
The Russell 2000 index, which tracks small-cap stocks, rose 10% in the past five trading days, marking its first increase since April 2020, while the S&P 500 index rose only 1.4% and the Nasdaq 100 fell 0.4% during the same period. The largest ETF that tracks the Russell 2000 index ranked second in terms of inflows among stock ETFs last week.
This is a big turn for the Russell 2000 index, which may have been boosted by the slowing inflation data, especially after Thursday's CPI led to a decline in the two-year US Treasury yield, and traders anticipate earlier interest rate cuts by the Federal Reserve.
Smaller companies are usually more sensitive to high borrowing costs because their debt burden is heavier than that of large companies.
"Hedge funds and traders held a record short position in small-cap stocks before last week's CPI report, and the weaker-than-expected data caught them off guard," said Cole Wilcox, CEO of Longboard Asset Management. "Finally, it triggered a violent rebound in small-cap stocks."
Russell 2000 index futures data shows that traders' net short position has reached its highest level since 2023. The $68 billion iShares Russell 2000 ETF has a short position of about 25%, while the $564 billion SPDR S&P 500 index ETF trust has a ratio of 9.9%.
However, some Wall Street professionals warn that the rise of small-cap stocks may have already become overheated. The Russell 2000 index has entered its deepest overbought area since December last year, which is a bearish technical signal and may indicate an imminent reversal in the index.