Russell 2000 breaks 200-day average as CPI risk looms

• Russell 2000 nears correction territory
• Treasury yield correlations among most negative readings since 2003
• Higher yields disrupt historically strong pre-midterm seasonality
• Break below 200-day average puts Liberation Day uptrend in focus

US small-cap equities have struggled since hitting record highs in August, partially reversing the strong rally seen earlier in the year.

With Treasury yields surging as high energy prices feed through to inflation, hitting consumers through higher gasoline and diesel prices, it's not difficult to see why from a fundamental perspective. The pressure has led to the Federal Reserve lifting interest rates for the first time in more than three years, with the prospect of at least another three hikes priced in by the end of next year.

For a cyclical index whose constituents are often reliant on the kindness of capital markets for funding, it comes as no surprise that the Russell 2000 is struggling, disrupting what has often been a strong seasonal period ahead of US midterm elections.

With the index now trading beneath its 200-day moving average, there is a growing risk that the unwind may have further to run, particularly if we see a hot US core inflation report later Wednesday.

Treasury yields increasingly influential

Source: LSEG

The underperformance of small caps is demonstrated in the graphic above, with Russell 2000 futures losing nearly 9% since mid-August, while Nasdaq 100 and S&P 500 futures have eked out small gains over the same period.

It's not the only explanation, but the continued rise in US Treasury yields has likely contributed to the underperformance. Analysis of daily market movements shows that the Russell 2000's relationship with US Treasury yields has become extremely negative by historical standards.

Over the past 120 sessions, or essentially half a year, the correlation between the index and daily changes in two-year Treasury yields stands at -0.53, with five-year and 10-year correlations at -0.60 and -0.59 respectively. While not extremely strong, all three sit among the most negative 1% of observations dating back to 2003.

Source: LSEG

Historically, rising yields have often been a sign of improving economic activity, but in this instance, it's not just firm nominal growth expectations due to the ongoing influence of AI on productivity and investment, but also the influence of high energy prices and increasing term premia associated with ongoing, unaddressed concerns about the US fiscal trajectory.

As the next graphic shows, large increases in Treasury yields have also coincided with small-cap underperformance in the past, particularly when the rise has been concentrated at the front end of the curve, as we saw in September.

Source: LSEG

By contrast, large declines in yields have tended to be followed by substantially stronger returns, making that a point of interest given the pullback in yields over recent weeks.

US midterms: Where's the usual pre-election rally?

The macro headwinds generated by substantially higher US borrowing costs have disrupted what has often been a strong historical seasonal pattern for small-cap equities before US midterm elections.

Looking back at US midterm elections since 1982, the Russell 2000 has risen by an average of 5.75% over the 20 trading sessions leading into polling day, with positive returns in eight of 11 periods. As the accompanying graphic shows, the pre-election rally has often been quite substantial.

Source: LSEG

That's a very different picture from what we're seeing in 2026, at least so far.

Adding to the uncertainty is the prospect of a change in congressional control, with recent polling raising the possibility of Democrats taking the House, potentially resulting in a divided Congress, or even gaining control of both chambers. While the historical sample is limited, previous changes in congressional control have produced mixed outcomes for small-cap equities.

The historical pattern has generally remained positive after polling day, with the Russell averaging gains of 6.20% over the subsequent 60 sessions, rising in eight of 11 instances. But there have been exceptions, including 1994 and 2018, when monetary policy tightening and concerns about the economic outlook weighed on equities.

As such, with the Fed in tightening mode and energy-driven inflation still filtering through the economy, there's no guarantee the historical bullish tendency will be seen this year.

200-day moving average gives way

Source: TradingView

Technically, the Russell 2000 contract finds itself in a short-term downtrend from its August highs, with the trendline now acting as resistance. At the same time, you've got a support zone comprising a long-running uptrend extending from the April 2025 lows, the 200-day simple moving average and horizontal support at 2,800.

Right now, the index is clinging to the bottom end of that support zone, having closed beneath the 200-day moving average on Tuesday. That leaves it teetering on the uptrend running from the April 2025 lows.

Looking at RSI (14), while it remains below the neutral 50 level, we've recently seen a string of higher lows, suggesting downside pressure is gradually starting to ease. That's been confirmed by MACD, which has crossed above its signal line from below, albeit it remains in negative territory and is flatlining at this stage.

Even though the momentum picture provides a cautious message to the bears, it still favours them overall.

If we were to see a breakdown through the support zone, it would put 2,761.6 in focus, the intraday low hit on October 7. If that were to be surpassed, bears would start looking for a retest of 2,720, a support level that's also acted as resistance during periods this year. Beneath that, there's not really a lot to speak of until 2,560, another level that has flipped between support and resistance on multiple occasions.

However, if the bulls were to step in and defend the support zone, that would bring levels overhead into focus, starting with 2,840, where downtrend resistance is currently located. Above that, 2,869.4, the October 6 high, would be the next level to watch, followed by 2,912 and the 50-day and 100-day moving averages around 2,924–2,938.

Given the unusually strong inverse relationship between the Russell 2000 and Treasury yields, today's US CPI report could have a significant bearing on which of these technical scenarios plays out. Movements in crude oil will also be important, having contributed to the uplift in Treasury yields, especially at the long end of the curve. A hotter-than-expected core inflation reading, accompanied by persistently elevated energy prices, could place additional pressure on the Russell, whereas the opposite scenario could provide fundamental support.