The final two months of 2023 will go down in the record books...

The market ended October in a correction. Then, stocks staged a furious double-digit rally. And they came close to hitting new all-time highs in December.

That's what happened with the S&P 500 Index. But that wasn't even the most notable momentum shift out there...

What we just witnessed in small-cap stocks was even crazier. The trend switched from extremely bearish to extremely bullish faster than we've ever seen. And according to history, that means small caps could jump 17% this year.

Let me explain...

Large-cap stocks soared last year. But their smaller peers were floundering.

Small caps didn't experience the same furious rally that large caps did. For them, the bear market of 2022 wasn't over. They were even hitting new bear market lows in October.

The good news is, that pain could be over now...

After hitting a 52-week low in late October, small caps finally came roaring back. They jumped more than 25% in less than two months. And by late December, they were hitting 52-week highs.

We can see that rally by looking at the small-cap benchmark – the Russell 2000 Index. Check it out...

Small caps packed several years' worth of gains into a few short weeks. These stocks even whipsawed from a 52-week low to a 52-week high in just eight weeks.

That's the fastest reversal from bearish to bullish we've ever seen in these stocks. And it's a week shorter than the second-quickest reversal on record.

This kind of turnaround also bodes well for future returns. And that makes sense... A quick move from a low to a high means the trend is in our favor. And buying with the trend at your back is always a good idea.

To find similar setups, I looked at every new instance of the Russell 2000 going from a 52-week low to a 52-week high within six months. That has only happened seven other times since 1980. And it almost always led to major outperformance. Take a look...

Small caps have been solid performers for decades. The Russell 2000 has churned out 8.2% annual gains with a typical buy-and-hold strategy. But buying after a setup like today's can lead to much larger returns...

Similar instances led to 5.2% gains in three months, 14.3% gains in six months, and 17.1% gains over a year. That's more than double the typical one-year return for small caps. What's more, stocks were higher a year later 86% of the time.

Small caps didn't stage a major recovery until the end of last year. But history shows 2024 could be the banner year for these stocks. That's why this is an area of the market you should watch closely in the months ahead.

Good investing,

Brett Eversole