On Wednesday, approximately four-fifths of the constituent stocks in the Russell 2000 index recorded declines. Since its peak in August, the index has seen a cumulative decline of 11%, falling below the 200-day moving average and entering a technical correction for the first time since March of this year. Analysts point out that the CPI in the United States is performing better than expected, increasing the likelihood of interest rate hikes, while small-cap stocks, consumer-related stocks, and transportation stocks are facing "sustained and long-term resistance."

The Russell 2000 index tumbled significantly on Wednesday, officially entering a technical correction and becoming one of the most vulnerable assets in the U.S. stock market under the current interest rate pressures.

On Wednesday, the U.S. economy grew more than expected in September CPI. After the data was released, market bets on a Fed interest rate hike in October rose to 50%. The Russell 2000 index fell by 1.9% on that day, with about four-fifths of the constituents in the index recording declines. Since its peak in August, the index has seen a cumulative decline of 11%, marking its first technical correction since March of this year.

The tightening interest rate outlook has rapidly shifted market sentiment, with small-cap stocks bearing the brunt of this pressure. Stefano Pascale, head of equity derivatives research at Barclays in the United States, stated:

Small-cap stocks are highly sensitive to interest rates. If today's inflation data increases the risk of further policy rate hikes, that would be an unfavorable sign for small-cap stocks.

Interest rates are rising, and multiple supports for small-cap stocks have been successively lost.

Under the pressure of continuously rising interest rates, the technical outlook of the Russell 2000 Index is gradually deteriorating. This week, the index fell below its 200-day moving average for the first time since March of this year; it had previously fallen below its 50-day and 100-day moving averages in August and September, respectively.

From a technical chart perspective, the index has formed a bearish V-shaped reversal since August and is currently within a downward trend channel. This week, it further fell below the 23.6% Fibonacci support level (around 2754 points), indicating that the downward momentum continues.

22V President and Chief Market Strategist Dennis DeBusschere pointed out that the unexpected upward movement in data on Wednesday CPI exacerbated the risk of further tightening financial conditions, which will become a "sustained and long-term obstacle" for small-cap stocks, consumer-related stocks, and transportation stocks.

The advantage of outperforming within the year has faded, and the leading position was relinquished last month.

The Russell 2000 Index has outperformed the S&P 500 Index for most of this year, and the logic behind this is that small-cap stocks are highly correlated with economic growth—strong consumer spending, as well as companies' large-scale investments in artificial intelligence infrastructure, have jointly supported the momentum of economic expansion.

However, this leading position came to an end last month. The Federal Reserve's interest rate hikes, coupled with a sharp rise in Treasury yields, put significant pressure on smaller-cap stocks that are more sensitive to interest rates.

Index rebalancing takes away core contributing stocks; the structural drag cannot be ignored.

In addition to macroeconomic interest rate pressures, the Russell 2000 Index has also faced a structural shock this year due to a major rebalancing of the index.

The four stocks Bloom Energy, Credo Technology, Sterling Infrastructure, and TTM Technologies contributed two-thirds of the increase in this index as of June 29th.

However, subsequently, all of the aforementioned stocks were included in the Russell 1000 index and were removed from the small-cap indices. As a result, the Russell 2000 index not only lost the favorable effects of interest rates but also the support of high-quality constituent stocks.

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