Small Companies Index Under Pressure as Real Rate Appreciates

Chart 1
Source: www.tradingview.com

Since the end of July, the US 10-year real yield has been moving upwards. US data has been strong, and inflation is proving to be sticky. The thinking has shifted that rates may be higher-for-longer.

In response, the US2000, FXCM's small companies CFD, has turned down and is starting to show signs of weakness. Its green 5-week EMA has crossed below its orange 10-week EMA (black circle), which is a bearish formation. Moreover, the US2000's RSI is slipping below 50 (green rectangle), which is the bearish side of the indicator. The longer this maintains the great the pressure on the US2000.

Chart 2
Source: www.tradingview.com

Chart 2 shows the relative strength between the US2000 and the SPX500 for the year-to-date. Clearly the US2000 has lagged the larger-cap SPX500 index.

The large-cap indexes have mainly gained from the AI-driven surge in tech stocks. Investors hoping for a broader rally have been optimistic about small-cap stocks, which are more linked to the economic cycle. They expected these stocks to do well as concerns about a recession or a sharp economic slowdown due to the Federal Reserve's aggressive tightening policies were replaced by resilient economic data.

However, despite the optimism surrounding better-than-expected economic data there has been persistent weakness, due to higher-for-longer concerns. Next week, the Fed is likley to hold rates but the rhetoric is likley to remain hawkish. This will likely keep the pressure on the US2000.