The Russell 2000 has dropped more than 5% over the past month as Treasury yields climb to levels last seen in the early 2000s, while the Nasdaq-100 has gained more than 5% over the same stretch. BTIG's Jonathan Krinsky says the ratio between the two indices has fallen to a level reached only three other times since 1985, and that a buying opportunity may yet emerge.
Small caps lag as yields climb
The Russell 2000 is down more than 5% over the past month, as 10- and 30-year Treasury yields soar to levels not seen since the early 2000s. Large-cap stocks have held up better against the same pressure. Against the Nasdaq-100, the small-cap index is down about 16%, according to BTIG's Jonathan Krinsky.
Small-cap companies are more exposed to higher rates because they have fewer financial resources and lean on borrowing to grow and refinance debt. As rates push higher, loans and debt refinancing both get more expensive. Investors have instead turned to technology and artificial intelligence-linked names during the yield spike, and the Nasdaq-100 is up more than 5% over the past month.
A rare oversold signal
Krinsky put the ratio's relative strength index at 12.77, marking just the fourth time since 1985 it has fallen below 14. The other three instances came in July 2007, August 2011, and March 2020. He noted the 2011 and 2020 episodes followed periods when the broader market had already seen extreme stress, whereas 2007 occurred with the S&P 500 near highs, as it is now.
According to CNBC: "Oversold does not mean over", Krinsky cautioned, pointing out that the ratio kept falling for 10 and 30 days after both the 2007 and 2011 signals. He added that yields are showing signs of exhaustion, and a meaningful move lower could give the Russell 2000 a needed boost.
Stocks positioned for a rebound
Barclays has highlighted several small-cap stocks that could outperform if the group bounces back, among them Ultra Clean Holdings, Penguin Solutions, and PTC Therapeutics. The sample of prior signals is small, but it marks a setup few investors have seen since 1985.
Source: CNBC
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