Small-cap mania is the sell signal nobody wants.

Transcript

Tom Small caps are ripping, everyone's cheering, and the last time that happened was right before the top. Buckle up.

Marie It's Friday, June 5th, New York edition. I'm Marie, with Tom and Gerald. Today: the small‑cap party may be the sell signal nobody wants to hear.

Gerald Yeah look, when the small‑cap ETF hits a fifty‑two‑week high and everyone's calling it a healthy rotation, my spidey sense tingles.

Tom Hold on, Gerald—small caps catching up is good! It means the rally is broadening. That's what bulls want.

Marie Tom, that's what they said in 2020 and 2007. James Mackintosh in the Journal points out small‑cap outperformance has historically been a prelude to market tops.

Gerald The small‑cap ETF up seventeen‑point‑four percent year to date, the S&P 500 ETF at a record seven‑fifty‑seven. The froth is real, mate.

Tom But it's not froth if earnings are growing! Come on, the economy is fine.

Marie I'll push back—it's not just earnings. The behavioral part is key. When small caps trounce large caps, it signals irrational speculation. That's the warning.

Gerald And to be fair, even the bulls admit it could be a blow‑off top. So maybe we don't sell everything, but we watch closely.

Tom Alright, fair enough. But if the small‑cap ETF dips, I'm buying. Just saying.

Marie Remember yesterday's episode? 'Hard assets are calling, tech's 2020 warning says listen.' Small caps now might be the second warning.

Tom And I sold the tech sector ETF. Gerald, your short on long‑duration treasuries is looking good too. So maybe we're not all wrong.

Gerald Ha, small victories. But let's talk geopolitics. The US‑Iran ceasefire talks stalled, Hezbollah rejected the truce. Oil might spike.

Marie The crude oil ETF is eleven percent below its high. That's a re‑entry point. And gold too—the gold ETF down nineteen percent from its peak. Safe haven demand could jump.

Tom Oil and gold as hedges? Boring, but yeah, in this environment, maybe not boring.

Marie Not boring! When the Middle East heats up, commodities are where you want to be. Look, last session oil actually pulled back despite the bad news. That's a signal.

Gerald To be fair, Marie's right. The market is sleeping on the geopolitical risk. That gives us a cheap hedge.

Tom And on the flip side, packaged food is getting hammered. Bernstein downgraded Kraft Heinz, Campbell's, General Mills. Oil costs up, GLP‑1 drugs changing diets.

Gerald Kraft Heinz down twenty‑three percent from its high, General Mills down nearly thirty percent year to date. The value guy in me says maybe it's overdone?

Marie Gerald, no—the structural headwinds from GLP‑1 are real. Consumer habits are shifting permanently. Campbell's rallied two‑point‑six‑seven percent last session, which just gives a better short entry.

Tom Yeah, I'm with Marie. Shorting a bounce in a dying sector. That's the play.

Gerald Campbell's rallying on a downgrade is like soup that's both cold and overpriced.

Tom Ha — fair enough.

Marie Oh, that's brutal. But true.

Gerald Alright, let's move to something warmer. Brazil's Petrobras wants to boost oil output by thirty percent by 2032.

Tom Petrobras trades at just four‑point‑four times forward earnings, up fifty‑one percent year to date, but still cheap. Asia is looking for alternatives to Iranian oil — the demand thesis is intact.

Gerald Up fifty‑one percent and still cheap? Tom, that's what worries me. When a stock runs that hard, the easy money's been made.

Tom But Gerald, valuation is still dirt cheap. And the growth story is just starting.

Marie I'll add: the Brazil ETF is only up eight percent year to date, so if you're worried about Petrobras overheating, you can play broader exposure.

Gerald Alright, that's a fair point. Diversified energy play. I'll give you that, Tom.

Tom Ha! Gerald concedes. Mark the calendar.

Gerald Oh come on. But let's shift to utilities—NextEra and Dominion planning a four‑hundred‑twenty‑billion‑dollar energy giant.

Marie Now this is my wheelhouse. Regulatory hurdles loom, but near‑term deal momentum could lift shares. NextEra is thirteen percent below its high, Dominion only four percent below.

Tom Utilities merging for renewables dominance—that's smart. I like NextEra here, the discount is bigger.

Gerald But regulatory risk is real. These deals take years, and anything can happen. Still, the stocks inched higher last session, so the market likes it.

Marie No but that's exactly my point—the market is underpricing the regulatory risk. But near term, the deal premium might persist.

Tom Buy the rumor, sell the fact? So buy NextEra now, then reassess when regulators start growling.

Gerald Fair. But let's talk about something that's not fairly priced: Blackstone's private credit gate. Four‑point‑four billion in redemption requests, they capped it at five percent.

Marie And the stock popped seven‑and‑a‑half percent! That's insane. A redemption cap is a red flag, not a reason to buy.

Tom Maybe it's relief that it wasn't worse? I don't know, Blackstone still thirty‑eight percent below its high. The market's reaction seems weird.

Gerald It screams complacency. When a redemption cap is cheered, you know the market's priced for perfection. Which brings us to the most original take of the day.

Marie Yes—the FT Lex piece on tech convertible bonds. Companies are issuing convertibles to sell volatility, essentially shorting their own stock to raise cheap cash.

Tom That's clever! If you're a tech company with a high‑flying stock, why not monetize that volatility? It's free money... until it isn't.

Marie Exactly! But it's a warning. If management thinks their shares are overvalued, they're effectively selling at the top.

Gerald And the crowded short‑vol trade in the volatility ETF, down fifty‑nine percent from its high, could reverse violently.

Tom But the vol ETF can stay low for ages. Vol sellers have been making bank. It's not a timing signal.

Marie No, but it's a regime signal. When companies are this clever about monetizing hype, it's a top‑of‑cycle indicator.

Tom Alright, I'll give you the big picture. But the Nasdaq 100 ETF is up twenty‑point‑eight percent year to date, one percent below its high — the momentum is tough to fight.

Marie And that's exactly the danger! Plus, the AI power sticker shock—Pinnacle West proposing a forty‑five percent rate increase for data centers.

Tom Wait, forty‑five percent? That's huge. Data center operators like Digital Realty are going to get crushed.

Gerald Digital Realty at sixty‑five‑point‑nine times forward earnings, ignoring this risk. Pinnacle West, the utility, benefits — trades near its high with an eighteen times P‑E.

Marie Love that asymmetry. Buy the utility, short the data center. It's a clean expression of AI's hidden costs.

Tom Okay, so we've got small‑cap froth, convertible gimmicks, redemption caps — our view is bearish tilt. But the bulls have a case.

Gerald Right. Earnings growth is real, the Fed is on hold, buybacks are relentless. Small‑cap strength could be a healthy rotation, not a top. Convertibles are rational finance.

Marie And the vol ETF can stay low for months. But I keep coming back to the cracks. The dollar crisis is missing from the coverage — EM currencies haven't routed despite geopolitics. That's odd.

Tom And Treasury yields are absent from today's scan. A spike in the long end would be the real wrecking ball. Watch the long‑term Treasury ETF.

Gerald So the cleanest trade? A dispersion trade: short the froth via the small‑cap ETF, long dull‑but‑essential utilities like Pinnacle West or NextEra. Or raise cash, add tail hedges with that cheap vol ETF.

Marie Exactly. Because when everyone's cheering small caps and convertible gimmicks, it's the sell signal nobody wants.

Tom And as always, none of this is investment advice — just our take.

Marie We're back tomorrow morning at ten a.m. London time for the Weekend Edition. If you're just finding us, hit follow on Spotify or check investmentflash.com for the full digest with charts and sources.

Gerald See you then.