Bullish Bets Surge as Traders Anticipate Interest Rate Cuts

Introduction

Record-Breaking Demand for Call Options

Goldman Sachs Group's team of options strategists noted a remarkable increase in bullish bets on the Russell 2000. A staggering 1.44 million call options, connected to an exchange-traded fund that tracks the small-cap index, were exchanged as traders sought to benefit from potential gains. This surge in demand marked an all-time high for daily turnover in small-cap call options.

Anticipation of Interest Rate Cuts

Traders are speculating that the Federal Reserve might commence a series of interest rate cuts as early as March. Their optimism stems from the belief that the central bank will act to stimulate economic growth. Gene Goldman, Chief Investment Officer at Cetera Investment Management, emphasized that many traders anticipate further upward movement in the index as a result of these potential rate cuts.

Market Sentiment and Analyst Predictions

Although the interest-rate futures market suggests only a slight possibility of the Fed's first rate cut happening in March, analysts at Goldman Sachs Group and other Wall Street economists predict that rate cuts will be implemented later in the year. Tuesday's spike in call option purchases indicates a surge in market sentiment toward small-cap stocks. This was the most significant increase in call option volume tied to the small-cap index since early June.

Impressive Performance and Outlook

Tuesday witnessed an exceptional performance by stocks, with the S&P 500 experiencing its largest daily advance since April. Additionally, the Russell 2000 exhibited its strongest relative performance compared to the S&P 500 in more than three years. This suggests that traders are increasingly optimistic about the future prospects of small-cap stocks.

In conclusion, the surge in bullish bets on the Russell 2000 reflects a growing belief among traders that interest rate cuts by the Federal Reserve will fuel further gains. The small-cap index's impressive performance and increased demand for call options indicate a positive outlook for the market.

Small-Cap Index Outperforms S&P 500

According to Dow Jones Market Data, the small-cap index has recently outperformed the S&P 500 by a significant margin. This outperformance of 3.54 percentage points is the largest since March 19, 2020, when it outperformed by 6.35 percentage points.

Still Trailing Behind

Despite this recent surge, the small-cap index is still trailing behind the S&P 500 and Nasdaq Composite. Year to date, the Russell 2000 has only gained 2.3%, compared to the impressive gains of 17.3% for the S&P 500 and 34.75% for the Nasdaq, as reported by FactSet data.

Signs of Optimism

Technical analysts have observed signs of optimism in Tuesday's rally. The rebound in small-cap stocks has painted an optimistic picture for this long-suffering corner of the market.

Approaching Resistance Level

However, it's important to note that the small-cap index is approaching a potentially powerful resistance level. Its 200-day moving average currently stands at 1,827 as of Wednesday's close. The Russell 2000 closed at 1,801.22 on Wednesday, with a modest daily advance of 0.2%.

Inflation Data and Fed Expectations

In October, the released inflation data showed that core consumer prices rose by just 0.2%, which is slower than the anticipated 0.3% increase predicted by economists. This data has cemented expectations that the Federal Reserve likely finished raising interest rates back in July and could potentially start cutting borrowing costs sometime next year.