Bond speculators are the most short since 2023. Small caps benefit if they're wrong.
The chain: bond short squeeze, rates drop, small caps outperform. Here's the data behind each link.
Nobody’s going to get a lot of clicks talking about bonds. That’s exactly why it’s worth your time.
The 30-year bond just reversed sharply higher. COT data shows large speculators at their most aggressively short since 2023. Last time they were this short, bonds ripped and rates came down hard. These guys are often wrong when the boat tips too far to one side.
If this reversal holds, rates drop. And when rates drop, the math shifts. Companies with heavy debt loads, no current revenue, and future-product timelines get cheaper financing. Biotechs. Quantum computing. Space. The speculative small-cap universe that’s been lagging mega caps all year.
The ratio chart confirms it. When rates drifted lower last year, small caps started outperforming. When rates moved higher this year, mega caps pulled ahead again. The relationship isn’t random.
TMF (3x long 20-year treasuries) is the direct play. 5% risk for a potential 10-15% move if bonds just retrace to recent levels. The indirect play is building a shopping list of beaten-down small caps now, before the rotation starts.
17.30% max drawdown over 25 years while the S&P drew down 57%. That number came from systems, not rate predictions. When the systems underperform because mega caps are running and our small-cap names aren’t, you hear about it in The Drawdown Memo.
Free 25-Year Backtest PDF: https://www.statsedgetrading.com/the-25-year-backtest
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— Michael Nauss, CMT, CAIA, CDMS