Market interest rates continue to rise with the US 10-year Treasury yield hovering near 1.9%. While higher rates are usually seen as negative for the tech sector that is often more indebted than other sectors, pick-up in yields is also negative for small caps. In fact, the small-cap index Russell 2000 has a debt-to-equity ratio of around 129% while this ratio for Nasdaq or S&P 500 stands at 89.5% and 114.5%, respectively. Dow Jones is even more indebted but a high share of financial institutions, like banks, cushions the index from a hit from higher rates.A break below the lower limit of Russell 2000 trading range that can be observed at press time was trigger by hawkish shift in Fed's policy but whether this breakout translates into a bigger sell-off will depend on whether Fed delivers on hawkish expectations.
Taking a look at Russell 2000 chart (US2000), we can see that the US small cap index dropped below the lower limit of a trading range today. In spite of other Wall Street indices reaching new all-time highs regularly, US2000 has been stuck in a 135 points wide consolidation for a year! Now this index is threatening to deliver a downside breakout from the pattern and according to classic technical analysis, such a scenario may herald a 135 points drop. This would push the price down to 1,860 pts - the lowest level since early-December 2020.
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