Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why the Russell 2000 Divergence Is the Real Risk Signal
Transcript
- Lucas: The Nasdaq is down five and a half percent in five days. The VIX is at twenty-one point seven. And yet the Russell 2000 — the small-cap index — is only down two point six percent. That is not a normal divergence. Luna: So the big tech names are getting hammered, but the little guys are barely flinching. That feels like a signal worth unpacking. Lucas: Yeah. And I think the temptation is to look at this and say 'see, the selloff is just in mega-cap tech, the rest of the market is fine.' But historically, when you see this kind of divergence, it usually resolves one of two ways. Either the Russell catches down — hard — or the Nasdaq stops falling and we get a real rotation into value. Luna: Which one are we betting on? Because the data we're looking at today, June 10, 2026 — the S&P 500 is down three point six percent in five days. The Dow is down two point six. The Russell is right there with Dow. So small caps aren't exactly thriving. Lucas: No, they're not thriving. But they're not crashing either. And that's the puzzle. The VIX is up forty-one percent in a week. The VVIX — the volatility of the VIX — is at one hundred seven point six, up twenty-five percent. That level of fear usually hits everything. But small caps are acting like they're in a different market. Luna: Could it be that the selloff is purely about artificial intelligence hype deflating? The Nasdaq is full of ai adjacent names. Small caps are less exposed to that narrative. Lucas: That's part of it. The big winners of the past eighteen months — NVIDIA, Microsoft, Alphabet — they're the ones getting sold. And small caps didn't participate in that rally the same way. So they have less to give back. But I also think there's a darker interpretation. The Russell 2000 is full of companies that are more sensitive to interest rates, more reliant on floating-rate debt. If the market is pricing in a recession, those stocks should be getting hit first. The fact that they're not could mean the market is still in denial. Luna: Let's pull up the yield curve. The ten-year is at four point five six, the two-year at four point fifteen. That's a spread of about forty basis points. Still inverted — well, technically not inverted since the ten-year is higher, but it's flattening again. Lucas: Right. The curve un-inverted earlier this year, which historically has been a recession signal — not a false alarm. Every time the curve has normalized after a deep inversion, a recession has followed within twelve months. We're now in month five of that normalization. So the clock is ticking. Luna: The last time we saw this kind of divergence — Russell holding up while tech sold off — was early 2000. After the dot-com peak, the Nasdaq fell thirty percent in a few months, but the Russell actually went up for a while. Then it crashed even harder. Lucas: Exactly. In 2000, small caps had a false sense of security. They were cheap relative to tech, so investors rotated in. But when the recession actually hit, small caps got crushed because their earnings are more cyclical. The Russell 2000 fell about forty percent from peak to trough in 2000-2002. The Nasdaq fell about seventy-eight percent, but the Russell's drawdown was still brutal. Luna: And what about 2008? Did we see a similar divergence? Lucas: In 2007, the Russell actually peaked in July 2007, before the S&P 500. So it led on the way down. That's different. But in 2000, it lagged. The question is which regime we're in. And I think the answer depends on whether this selloff is just a tech correction or the beginning of a broader economic slowdown. Luna: Let's look at the economic data. Real GDP growth for the first quarter of 2026 was annualized at one point six percent. That's up from zero point five in Q4 2025, but it's still below trend. And nominal GDP is thirty-one point eight trillion. So the economy is growing, but slowly. Lucas: Right. It's not a recession yet. But the yield curve is signaling that one is coming. And the VIX at twenty-one point seven with a VVIX at one oh seven point six is interesting. The VIX is elevated but not panic territory. The VVIX, though, is at levels we usually see only during crisis. That tells me options traders are pricing in a lot of tail risk — they're buying protection against a big move, but they don't know which direction. Luna: So the market is saying 'something bad might happen, but we don't know what.' That's not a great environment for buying the dip blindly. Lucas: No. And I think the playbook from the last few years — buy every five percent drop — might not work this time. Because the structure of the market is different. The top ten stocks in the S&P 500 now make up over thirty-five percent of the index. When those stocks sell off, they drag the index down, but the average stock might not be as cheap as it looks. Luna: Let's talk about the Russell 2000 specifically. Its price to earnings ratio has been elevated relative to history — around twenty-two times forward earnings. That's not cheap for small caps, which usually trade at a discount to the S&P 500. So if earnings start to slip, those stocks could get repriced quickly. Lucas: And that's the risk. The divergence we're seeing today might be a calm before the storm. If the economy slows as the yield curve suggests, small-cap earnings will fall more than large-cap earnings because they have less pricing power and more debt. The Russell could catch down in a hurry. Luna: But what if the selloff stays contained to tech? What if the market rotates into value and small caps actually benefit? That's the bull case. Lucas: It's possible. But I think you need to see a catalyst — like the Fed cutting rates aggressively or a resolution on trade policy. Right now, the ten-year at four point five six is not exactly screaming 'easy money.' And the Fed has been patient. They're not going to cut until inflation is sustainably at two percent, and core PCE is still above three percent. Luna: So the bottom line for listeners: if you're sitting on cash, do you buy the dip in small caps or wait? Lucas: I'd wait. Not because I'm bearish on small caps long-term, but because the divergence is a red flag. Historically, when the Russell diverges from the Nasdaq like this, the resolution is usually a catch-down, not a catch-up. And with the VVIX at one oh seven, the market is telling you it expects a big move. I'd rather buy after the move happens than try to predict it. Luna: Before we wrap, I want to touch on something. We've been doing this podcast for a while, and it's ad-free. That's intentional — we don't want to interrupt the conversation. But a handful of listeners have asked how they can support us directly. Lucas: Yeah, it's a small group, but it makes a difference. If you've gotten value from these episodes — maybe a framework that helped you think about your portfolio differently — there's a way to chip in. It's buy me a coffee dot com slash fexingo. No pressure. It just helps us keep doing this without selling out to sponsors. Luna: And we mean that. The listener-funded model lets us be honest about what we see in the data. So if that's something you support, great. If not, the show stays free either way. Lucas: Okay, back to the divergence. One more data point I want to throw in: the New York Stock Exchange composite index — which is broader than the S&P 500 — is down only one point three percent in five days. That tells me the selling is concentrated. It's not a systemic liquidation yet. Luna: So the Russell is kind of in the middle — not getting crushed like the Nasdaq, but not as resilient as the NYSE composite. Lucas: Exactly. And that middle ground is where the risk lives. Because if the selling spreads, the Russell has the most downside relative to its recent performance. The Nasdaq has already corrected. The Russell hasn't. That asymmetry is why I'm cautious. Luna: What would change your mind? What would make you say 'okay, now is the time to buy small caps'? Lucas: I'd want to see the VIX come down below eighteen, or the Russell correct another five to seven percent. That would tell me the fear is priced in, not just in tech but across the market. Or I'd want to see the yield curve steepen — the ten-year moving above four point seven five with the two-year stable, which would signal that the economy is reaccelerating. Until then, I'm watching but not pulling the trigger. Luna: So the takeaway: divergence is a warning, not an opportunity. Lucas: That's the frame. And I think it's the right one for the rest of June. We'll be watching the Russell closely. If it starts to break down, that's when the market narrative shifts from 'tech correction' to 'broad downturn.' Luna: Good episode. Let's see what the data shows next week.