Small caps are getting squeezed as rising Treasury yields put more pressure on the market.

Treasury yields surged Wednesday after stronger-than-expected U.S. business activity increased expectations that the Federal Reserve may raise interest rates again in October. The 10-year Treasury yield climbed to around 5.10%, while the 5-year yield moved above 5% for the first time in nearly two decades. Pressure intensified after a weak $70 billion 5-year Treasury auction, which produced a 5.033% yield and a low 2.21 bid-to-cover ratio, signaling softer investor demand for government debt. Rising yields increase borrowing costs throughout the economy and can be particularly difficult for smaller companies that tend to rely more heavily on financing.

Chart: IWM is showing a strong bearish setup as small-cap stocks come under pressure from higher interest rates. Price has fallen below its 8-, 21-, and 55-day EMAs, while the PPO remains below its signal line and below zero. The directional indicators strongly favor the downside, with −DI at 39.85 versus +DI at 16.75, while ADX at 34.74 confirms that the current trend has considerable strength. RSI has declined to 34.97, showing bearish momentum while remaining above our oversold threshold of 25. With both the Treasury-rate catalyst and technical indicators pointing lower, IWM puts offer a way to position for continued weakness in small-cap stocks.

Wishing you the very best, 

Wendy