Recently, the US market has been severely volatile, with once popular tech giants stocks suffering heavy losses, while small-cap stocks and high-yield bonds surprisingly gained, causing widespread attention from investors about the market direction.

Specifically, large-cap tech stocks represented by the Nasdaq index and "Mag 7" suffered heavy losses, with Nasdaq's weekly decline of 4.8% being the largest since 2022. At the same time, the small-cap stock index Russell 2000 rose against the trend, with the best monthly performance since 2024 in sight.

Some analysts believe that the above phenomenon highlights that the market may be undergoing a significant capital rotation, but the sustainability of the small-cap stock rebound has also been questioned.

Tech stocks are out of favor, small-cap stocks are emerging, and VIX is surging.

Recently, the Nasdaq index suffered its largest single-day decline since 2022, with the "Mag 7" index falling by 4.8% for the week.

In contrast, the Russell 2000 small-cap stock index is expected to have its best monthly performance since 2024, while US high-yield bonds have recorded their longest consecutive rise since 2020.

Amy Wu Silverman, head of derivative strategies at RBC Capital Markets, pointed out:

"The market sentiment has indeed reached a turning point... Now you can see the demand for hedging positions like Nvidia stocks"

This judgment is confirmed by multiple market indicators, such as:

1. The cost of tail risk contracts has seen the largest increase this year.

2. The VIX index has risen to nearly 17, the highest level since April.

3. Investors are buying a large amount of S&P 500 index ETFs while selling tech stock derivatives.

Political factors, inflation expectations, and the industry rotation brought about by inflation expectations can partially explain the change in market style:

1. Political factors: Trump's election prospects have improved, and the market's potential policy response is positive.

2. Inflation expectations: June CPI is lower than expected, strengthening expectations of rate cuts.

3. Industry rotation: demand for economically sensitive industries is rising, as the market is betting that the Fed has room for rate cuts, reducing the burden on debt financing industries.

Are small-cap stocks a "safe haven"? Barclays has a different view.

With this background, will small-cap stocks become a "safe haven" for funds?

In contrast to the current market's generally positive view of small-cap stocks, Barclays Bank reminds investors that historical data shows that small-cap stocks generally perform poorly after rate cuts. Barclays wrote:

Small-cap stocks have gained new favor on Wall Street, but there are not many factors supporting the expectation of a surge in this sector.

Barclays strategist believes that the Russell 2000 index, which tracks small-cap stocks, usually falls at the beginning of rate cuts. "We believe this is contrary to the widespread view that the beginning of a rate cut cycle will bring a sustainable upward trend to small-cap stocks," the report said.

The report compared the performance of the Russell 2000 index and the S&P 500 index during 13 interest rate cycles from 1980 to 2020. Although the report acknowledged different results, the overall trend showed a decline within 150 days before and after the first rate cut.

Currently, Wall Street's optimistic sentiment towards small-cap stock trading is gradually increasing. Barclays believes that part of the reason is that lowering interest rates may help alleviate debt burdens, but it may also indicate a cooling of the economy, which is more favorable for large-cap stocks.

Ed Yardeni, a veteran of Wall Street, also wrote this week that the trade lacks support because small-cap stocks lack forward-looking earnings, revenue, and profit margins.

Liz Young Thomas, director of investment strategy at SoFi, expressed doubts about the persistence of small-cap stocks:

"As the Fed begins an interest rate cut cycle, the market tends to be happy in the initial stages or even in the short time after the interest rate cut begins.

But if the interest rate cut cycle coincides with a slowdown in economic data, disappointing earnings, or a rapid contraction in the P/E ratio, small-cap stocks may lose momentum quickly.

Dow Jones, gold, and US Treasuries are falling, but bitcoin is still strong.

If small-cap stocks are not an absolute safe haven, what about other assets? Let's review the performance of various assets this week:

1. Gold: fell from a historical high, with a decline of more than 2% on Friday, mainly affected by a strong US dollar and profit-taking.

On Friday, gold fell more than 2%, mainly due to profit-taking and a strong US dollar. Alex Ebkarian, COO of Allegiance Gold, said:

"In addition to profit-taking, the market fell due to the narrative of a soft landing, which could put pressure on the gold price as investors shift funds from safe haven investments to riskier investments."

Currently, the market expects the probability of the Fed's interest rate cut in September to be 98%. Chris Mancini, deputy portfolio manager of the Gabelli Gold Fund, said:

"If a weak economy leads to government stimulus, especially infrastructure investment, then gold and industrial metals will rise simultaneously."

2. US Treasuries: yields rise slightly as investors refocus on the Fed's interest rate cut.

This week, US yields rose due to concerns about Trump's fiscal and trade policies, which will stimulate inflation and growth.

Specifically, the benchmark two-year US Treasury yield rose 6 basis points to 4.51%, while the 10-year Treasury yield rose to about 4.24%.

With the support rate of Trump increasing after the assassination event, PredictIt data shows that Trump's probability of winning in November has reached 63%. Currently, traders are refocusing on the possibility of the Fed cutting interest rates as early as September.

Swaps traders believe that a rate cut by the Fed in September is almost certain, with a priced-in yield of 24 basis points. For the entire 2024, traders expect two 25 basis point rate cuts and a probability of about 40% for the third rate cut.

3. US dollar: up for the first time in three weeks

This week, Bloomberg's US dollar spot index rose 0.5%, the first increase in three weeks.

"No matter how the actual government situation is, there will still be investors who believe that the US dollar itself will continue to serve as a global currency and maintain its value in a tense political situation," said Helen Given, a foreign exchange trader at Monex.

Regardless of the actual government situation, there will still be investors who believe that the US dollar will continue to be a global currency and maintain its value in a tense political situation.

4. Bitcoin: Breaking through $67,000 against the trend, reaching a new high in more than a month.

This week, bitcoin broke through $67,000 for the first time in over a month. It is worth noting that the strength of bitcoin is partly attributed to the market's optimistic expectations of a potential Trump victory, believing that it will create a more favorable regulatory environment for cryptocurrencies.

Editor/Somer