Source: Wall Street See
Biotechnology and regional banks, which were heavily shorted before, performed the best in terms of stocks. Analysts believe that short-covering is a major factor driving the recent rise in the Russell 2000.
Recently, US small-cap stocks have finally turned around. With the expectation of a Fed rate cut, funds have flocked to the Russell 2000 index, which has risen by 12% in just 5 trading days. Although it has fallen back in the past two days, the index's increase over the past week is still around 9%.
iShares Russell 2000 ETF (IWM) has become the big winner. According to Bloomberg data, it attracted $7.1 billion of inflows in the week ending Wednesday, compared with about $2.7 billion for the Invesco QQQ Trust (QQQ), which tracks the Nasdaq 100 index. However, since 2024, IWM has seen $1.1 billion of outflows.
Just as investors are caught up in the frenzy of small-cap stocks, some analysts warn that this may only be a short-lived short-selling trend, and even if the momentum continues, following the index may not be the right way to invest.
Eric Johnston, Chief Equity and Macro Strategist at Cantor Fitzgerald, predicts in a recent report that small-cap stock returns this year are expected to be at the same level as 2021; part of the recent trend is due to short-selling pressure, which is not sustainable; valuations are already at high levels, and short-selling interest is also high.
Ed Yardeni, founder of Yardeni Research, emphasized the short selling nature of the recent rise in a media interview:
"You'll see biotech and banks, especially small regional banks, rising sharply, many of which may just be simple short covering."
"I don't know if their fundamentals have fundamentally changed, so I will be cautious about chasing mid-cap stocks and the Russell 2000."
Bank of America also holds a similar view, stating in a report released on Thursday that short covering is a key factor driving the Russell 2000's rise, especially for stocks that were heavily shorted before and performed the best.
Savita Subramanian, head of US equity and quantitative strategy at Bank of America, pointed out during a mid-year outlook conference call that one-third of the Russell 2000's constituent companies are still losing money.
"In small-cap stocks, high-quality stocks are more attractive, such as industrial and energy companies. Sectors that may be more sensitive to GDP and consumption are also attractive, while companies with more refinancing risks or more sensitive to interest rates are still in the observation period until the Fed really starts cutting rates."
Indeed, in trading on Wednesday and Thursday, small-cap stock trading seemed to lose momentum, but many other small-cap stock funds outside of the IWM ETF still show a lot of optimism in the market.
Editor/Lambor