Recently, the US market has experienced severe fluctuations, and once popular technology giants have suffered heavy losses, while small-cap stocks and high-yield bonds have unexpectedly strengthened, attracting widespread attention from investors about the market. Specifically, technology large-cap stocks represented by the NASDAQ index and the "Mag 7" suffered heavy losses, with the NASDAQ single-week decline of 4.8% being the largest since 2022. At the same time, the small-cap stock index Russell 2000 has risen against the trend and is expected to achieve the best monthly performance since 2024. Some analysts believe that these phenomena highlight that the market may be experiencing a significant fund rotation, but the sustainability of the rebound in small-cap stocks has also been questioned.

In particular, technology large-cap stocks represented by the NASDAQ index and the "Mag 7" suffered heavy losses, with the NASDAQ single-week decline of 4.8% being the largest since 2022. In contrast, the small-cap stock index Russell 2000 has risen against the trend and is expected to achieve the best monthly performance since 2024.

Some analysts believe that these phenomena highlight that the market may be experiencing a significant fund rotation, but the sustainability of the rebound in small-cap stocks has also been questioned.

Technology stocks are out of favor, small-cap stocks are rising unexpectedly, and VIX is erupting.

Recently, the NASDAQ index had the largest single-day decline since 2022, and the "Mag 7" index had a weekly decline of 4.8%.

In sharp contrast, the Russell 2000 small-cap stock index is expected to achieve the best monthly performance since 2024, and US high-yield bonds have recorded the longest consecutive gains since 2020.

Amy Wu Silverman, the head of derivatives strategy at RBC Capital Markets, pointed out:

"Market sentiment has indeed reached a turning point... now you can see the demand for hedging stocks such as Nvidia"

This judgment has been confirmed by many market indicators, such as:

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

2. The VIX index rose to nearly 17, its highest level since April.

3. Investors bought a large amount of S&P 500 index ETFs and sold derivatives of technology stocks.

Some analysts believe that political factors, inflation expectations, and industry rotations caused by inflation expectations can partially explain the shift in market style:

1. Political factors: Trump's election prospects improved, and the market reacted positively to his potential policies.

2. Inflation expectations: June CPI was below expectations, strengthening expectations of rate cuts.

3. Industry rotation: demand for economically sensitive industries has increased because the market is betting that the Fed has room to cut interest rates, thereby reducing the burden of debt financing industries.

Are small-cap stocks a "safe haven"? Barclays' views are different.

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

In contrast to the widespread view in the current market that small-cap stocks are highly favored, Barclays Bank reminded investors that historical data showed that small-cap stocks often performed poorly after rate cuts. Barclays wrote:

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

Barclays strategists believe that the Russell 2000 index, which tracks small-cap stocks, usually falls at the beginning of an interest rate cut. "We believe that this is contrary to the widespread view that a rate cut cycle will bring sustainable upward trends for 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 cut cycles from 1980 to 2020. Although the report acknowledges different results exist, overall, it showed a downward trend in the first 150 days before and after the first interest rate cut.

Currently, Wall Street's optimism for small-cap stock trading is growing. Barclays believes that part of the reason is that lower interest rates may help alleviate debt burdens, but it may also signal an economic downturn, which is more favorable for large-cap stocks.

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

SoFi Investment Strategy Director Liz Young Thomas is skeptical of the small-cap stock trend's sustainability:

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

But if an interest rate cut cycle coincides with a slowdown in economic data, disappointing profits, or a rapid compression of P/E ratios, small-cap stocks may quickly lose momentum.

The Dow, gold, and US Treasury bonds are all down, while Bitcoin remains strong.

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

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

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

"In addition to profit-taking, the market fell due to the narrative of a soft landing, which may put pressure on gold prices because investors will shift funds from safe-haven investments to higher-risk investments."

Currently, the market expects the probability of the Fed cutting interest rates in September to be 98%. Chris Mancini, Deputy Portfolio Manager of Gabelli Gold Fund, said:

"If a weak economy leads to government stimulus, especially infrastructure investment, gold and industrial metals will rise at the same time."

2. US bonds: yields rose slightly, and investors refocused on the Fed's interest rate cut time.

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

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

Following Trump's rising support after the assassination attempt, PredictIt data shows that the probability of Trump winning in November has reached 63%. Currently, traders are paying attention again to the possibility of the Fed cutting interest rates as early as September.

Swaps traders believe that a September interest rate cut by the Fed is almost certain, with the contract implying a rate cut of 24 basis points. Throughout 2024, traders expect two 25 basis point interest rate cuts and a 40% probability of a third interest rate cut.

3. US dollar: first rise in three weeks

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

"No matter what the actual government situation is, investors will still believe that the US dollar will continue to serve as the global currency and maintain its value in the tense political situation," said Helen Given, Monex's forex trader.

No matter what the actual government situation is, investors will still believe that the US dollar will continue to serve as the global currency and maintain its value in the tense political situation.

Bitcoin: against the trend, broke through $67,000, a new high in over 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 optimism about Trump's potential victory and the belief that it will create a more favorable regulatory environment for cryptocurrencies.

Editor/Somer