For the first time this year, small caps are starting to prove why they're worth owning...
Last week, we looked at the massive one-week surge in this group. Small-cap stocks rallied 6% in the second week of July. And history shows that's a strong sign of more gains to come.
What's more, the positive signs keep stacking up.
Small-cap stocks did something even more unusual during their recent breakout... And according to history, it means we could see 23% upside over the next year.
As an investor, the trend is your friend. Rising assets tend to keep rising. That's why we keep an eye on markets that string together a long streak of consecutive daily gains.
When a market rises day after day, it's a sign that the trend is strong. And you can take that idea to another level... watching a market rise 1% or more, day after day.
That's what small caps did in recent weeks. They jumped 1% or more for five consecutive trading days. That run ended with a 3.5% jump on July 16. And overall, the benchmark Russell 2000 Index soared nearly 12% during those five days.
This kind of multiday rally doesn't happen often. We've only seen four similar setups since the data began in 1979. So, to get a few more data points, I looked at every unique instance of the Russell 2000 rising 1% or more for four consecutive days.
That's still rare. It has happened 13 other times, or about once every three years. But when it occurs, big gains tend to follow. Take a look...
Like we discussed last week, small caps have been big winners over history. They've rallied 9.2% per year since 1979, nearly keeping up with large-cap stocks over that time.
But you can do much better in situations like we're in today...
Similar setups led to 12.3% gains in six months and 22.8% gains over the next year. Plus, small-cap stocks were higher 85% of the time a year later, making our odds of success today darn high.
Lots of folks are continuing to ignore small caps despite this recent move higher. A decade of underperformance has conditioned them not to care. But history says that's a mistake...
Small caps are moving in a way we haven't seen in a long time. And the wild nature of the recent rally tells us this is only the beginning.
So stop ignoring small caps today. Instead, it's time to consider owning them.
Good investing,
Brett Eversole
Further Reading
"The good times are far from over," Brett writes. Stocks rallied 15.3% in the first half of 2024. And according to history, that bullish momentum should continue into the end of the year... Read more here.
The market's "fear gauge" recently surged higher. These readings tell us fear is back in the market. But that's no reason to panic yet. History tells us the bull run has plenty of runway ahead... Learn more here.
