As discussed over the weekend, despite the seemingly endless retail euphoria which has plowed a record amount of cash YTD into broad market ETFs, the latest CFTC data showed that for the first time since the election speculators turned net negative on the Russell 2000 after hitting an all time high as recently as December.

Overnight, SocGen’s Andrew Lapthorne alto pointed out the recent “re-rating” of small caps, and in a note titled “US smallcaps suffer in the face of increasing EPS downgrades”, observes that whilst the S&P 500 is only slightly off its recent all time highs, the smaller cap Russell 2000 performance is looking more problematic.

Lapthorne says that the Russell 2000 was struggling prior to last year’s US election with many investors concerned by overvaluation, struggling profitability and excessively leveraged balance sheets.

This attitude almost changed overnight with the index rocketing 20% higher in the weeks after the election of Donald Trump, propelled higher through a combination of bullish Trumpenomics expectations but also a fair amount of short covering.

That the Russell 2000 is underperforming the S&P 500 is notable, particularly as it flies in the face of particularly strong small business survey data suggesting better times ahead.

Finally, it is also worth noting that whilst 2017 EPS forecasts for S&P 500 earnings have barely budged this year, Russell 2000 2017 EPS expectations are down 4%, which while hardly a disaster is worth keeping an eye on. His conclusion: “for all the reflation talk EPS momentum remains largely uninspiring.”

Judging by the spec futures chart, hedge funds have clearly noticed the fundamental problems and have started to press the small cap index lower.

Furthermore, as shown in the EV/sales and EV/EBITDA charts below, if the correction in the RUT has indeed begun, there is a long way to go from here.