In short: RPK: the "bearish Russell 2000" signal diverging from the S&P's bullish-for-now signal is where the breadth damage shows. (IWM is the proxy; they speak of the index.)
1:22So there's roughly 30 to 35% of names above the 50-day moving average, or the moving monkey as we lovingly call it around here. You can see this, it picks up in the diverging signals between the bearish Russell 2000 and the bullish-for-now signal on the S&P. I don't have it in front of me, but maybe Sam recalls exactly where the trend line is on the S&P 500.
In short: The short leg of the small-cap pair, and the index most exposed to a hike. "The Russell 2000 is the most sensitive to interest rates with 40 to 45% of the index being unprofitable… which is why the Russell is so weak last week… pre-2010, the non-profitability was only 15 to 20%." Three mechanisms: "30 to 45% of the debt held by Russell 2000 companies carries floating rate interest exposure compared to less than 10% for the S&P 500"; "a 2026-2027 maturity wall"; and "40% of… Russell 2000 constituents have interest coverage ratios below 1.5, which means their EBITDA cannot cover their interest payments." The instruction: "you should buy the S&P Small Cap 600 index over the IWM and short the IWM." (At the close of the call the Russell was the least weak index — "only down 16 bips because… bond yields are actually back down" on the growth scare — the pair's reminder that it is a rates trade.)
The Russell 2000 is the most widely followed index of small US companies, and IWM is the fund that tracks it. Singh wants to bet against it because of what is inside: 40-45% of the companies lose money, far more than the 15-20% before 2010, a result of years of near-zero interest rates that let unprofitable firms borrow and list easily.
Those companies are exposed to rate rises in three ways. Between 30% and 45% of their debt has floating rates that reset as soon as the Fed moves, versus under 10% for S&P 500 companies. A lot of their debt comes due in 2026-27 and must be refinanced at today's higher rates. And about 40% of them do not earn enough to cover their interest payments comfortably. If the Fed hikes, this index should be hit harder than larger, profitable companies — which is why Singh pairs the bet against it with a purchase of the S&P SmallCap 600, which screens out loss-makers.
Full passage: premium transcript (PDF).
In short: Evidence the AI money is spreading out: "the Russell 2000 has double the performance of the S&P year to date and actually is outperforming the S&P in the past two years… it's not just a 2026 phenomenon."
IWM holds the Russell 2000 — roughly the 2,000 smallest companies in the big US index universe, i.e. "small caps." For years the story was that only the giant tech names went up.
Sonders points at the scoreboard: small caps have returned double the S&P 500 so far this year, and they have beaten it over the past two years too, so it is not a 2026 fluke. Her reading is that the money chasing anything AI-related has spilled well past the handful of mega-caps and is hunting for the next "shiny new object" — which is exactly what her "rotation is the new momentum trade" framing predicts.
30:53So some of that dispersion we're already seeing and that's why this desire to invest in all things AI has expanded well beyond that core aggregate group like the Mag 7 and it's part of the reason why you're seeing the Russell 2000 has double the performance of the S&P year to date and actually is outperforming the S&P in the past two years.
In short: The clean short of a hawkish Fed. "Because of the interest rate volatility with the two-year spiking, small caps lagged significantly, shedding about 140 bips as duration and rate-sensitive names sold off at the end of the week." The mechanism he restates every time: "remember that the Russell has a lot — half the companies are unprofitable. So if interest rates go up and they have debt, that affects them more than large-cap companies." Dan Niles frames the same session as "a hawkish Warsh on Friday led to a bear flattening of the yield curve and a sell-off in the IWM," and the report's "Potential Reductions" says to trim small-cap equity exposure (Russell 2000 / IWM) on bear-flattening sensitivity, refinancing headwinds and negative earnings skew.
IWM tracks the Russell 2000, the index of small American companies. It fell about 1.4% on the week while large-cap value rose, and the mechanism is one Singh restates every time rates move: "the Russell has a lot — half the companies are unprofitable. So if interest rates go up and they have debt, that affects them more than large-cap companies."
Two things happen to a small unprofitable company when yields rise. Its existing debt costs more to refinance, which comes straight out of whatever cash it has. And because its value rests almost entirely on profits expected years from now, a higher discount rate reduces what those distant profits are worth today by more than it does for a company earning money now.
The specific move this week was a "bear flattening" — short-term yields rising faster than long-term ones, which is what happens when the market suddenly believes the central bank will raise rates. That is the most direct possible hit to a leveraged, unprofitable borrower.
The report's instruction is to trim the exposure. It is the cleanest way to express the view that Warsh has made a hike more likely, without needing to be right about when.
Full passage: premium transcript (PDF).
In short: US small caps also chalked up a new all-time high on Friday (after recent consolidation), and have "clearly turned the corner relative to Mag-7" — a promising sign of broadening / bullish rotation (overlooked names playing catch-up). Valuations and technicals align: bigs expensive, small caps cheap.
In short: Go "down in size" — the Russell is beating the S&P YTD (12% vs 7.5%) and sidesteps the bubble megacaps.
IWM tracks the Russell 2000 — an index of about 2,000 small US companies, the opposite of the handful of giant tech names dominating the S&P 500. Hay's advice is to go "down in size," meaning own smaller companies to escape the crowded megacap bubble.
The data backs it up: the Russell is up about 12% this year versus 7.5% for the S&P, so the smaller stocks are already quietly winning while avoiding the most overvalued names.
39:27uh you know it's probably true that as gold went ballistic that there was more of a backing off of the volume accumulation but I believe they continued to buy through that period. — And then finally do you have a preference for size? Now I've noticed that the Russell has been outperforming the uh S&P uh year to date 12% versus 7 and a.5%.
In short: "Small caps still can?" — IWM is +70% off its 2025 low and back into weekly-overbought, but Frank Cappelleri notes the 2020–21 advance ran ~+150% (the +70%/overbought point then was only the middle of the run), so this could still be mid-run rather than exhausted. An overlooked corner versus the mega-caps.
In short: Small caps beat the Nasdaq 100 by a record streak in early January (broke the old record by ~6 days), wrecking the quants. Unresolved: a healthy broadening — or the final chase into the last cheap stocks before a rollover.
9:32I think that we had, you referenced the small caps. I think that they went up the most they've ever gone up versus the NASDAQ 100 in terms of number of days by like they beat the old record by like six days or something like that. It was just every single day you pull up the chart, it just every day was just and it really felt to me like that there was somebody big that was offside or had come in or someone else had come in and said, "Okay, in the new year, we're going to rebalance our portfolio.
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