S&P 500’s Relentless Grind: Why Small Caps Are Still Dead Money and Liquidity Is the Real Risk

January is supposed to be the month for small caps. That’s the old playbook, anyway. But as of February 1, 2026, the S&P 500 is up 1.4% for the year, while small caps are, once again, the market’s forgotten children. The big get bigger, the small get smaller, and the only thing that outpaces the S&P is the collective volume of think pieces about why this time is different.

The facts are as stark as they are repetitive. According to Seeking Alpha, the S&P 500 closed January with a modest gain, setting a “positive tone” for February. But the momentum is already waning. MarketWatch warns that there’s now a “bigger risk for stocks than the economy or corporate earnings.” That risk? Liquidity. Treasury issuance is draining cash from the system, with the Treasury General Account sucking $64.3 billion out of markets, per Seeking Alpha. In other words, the Fed isn’t the only game in town anymore.

Meanwhile, small caps are still the butt of the joke. Another Seeking Alpha piece spells it out: “Smaller stocks are useless, for now.” The Russell 2000 can’t catch a bid, and the alpha drought is real. The only thing smaller than the returns is the audience for small-cap webinars.

The context is clear. The S&P 500’s outperformance isn’t just about tech. It’s about size, liquidity, and the relentless hunt for safety in scale. XLK, the tech ETF, is holding steady at $143.90, flat on the day but still near all-time highs. The energy sector is flagged as a “leading indicator,” but so far, it’s just leading the way to more underperformance for everyone not named Apple, Microsoft, or Nvidia.

The macro backdrop is getting trickier. Treasury settlements and TGA rebuilds are draining liquidity, and the market is starting to notice. The days of endless risk-on may be numbered, especially if the Fed decides to get cute with rate guidance. The S&P’s grind higher is masking a lot of crosscurrents. Under the hood, breadth is narrowing, and volatility is lurking.

The analysis is simple: this is a market that rewards size and punishes everything else. The “bigger is better” trade is alive and well, and until liquidity conditions improve, don’t expect that to change. The risk is that everyone is on the same side of the boat. If liquidity tightens further, the unwind could be fast and ugly.

Strykr Watch

The S&P 500 is flirting with resistance near recent highs. The key level to watch is the January close, up 1.4%. If the index can hold above that, the grind could continue. But momentum is fading, and technicals are stretched. XLK at $143.90 is a bellwether. If tech cracks, the whole market could follow. Small caps remain in a downtrend, with no signs of life. The breadth indicators are rolling over, and the VIX is starting to stir.

Liquidity is the wild card. If Treasury issuance accelerates, risk assets could get hit. Watch the TGA and repo markets for signs of stress. If the S&P 500 loses its grip on recent support, look out below. The risk is asymmetric to the downside.

The bear case is a liquidity-driven correction that catches everyone leaning long. The bull case is that the grind continues as passive flows keep the bid alive. For traders, the play is to stay nimble and respect the tape.

The opportunity is to fade small caps on rallies and ride the S&P 500 until the music stops. But keep stops tight. This is not a market for heroes.

Strykr Take

The S&P 500’s relentless grind higher is impressive, but it’s masking real risks. Liquidity is tightening, and the small-cap graveyard is getting crowded. For now, size wins, but the risk of a sudden reversal is rising. Stay nimble, stay skeptical, and don’t fall in love with your positions.

Strykr Pulse 61/100. The trend is your friend, but liquidity is your enemy. Threat Level 3/5.