The Russell 2000, a small-cap index of US stocks, has just pulled off an extremely rare move.
It went from underperforming the S&P 500 by 7% to outperforming it by 7% in just 5 weeks.
This is not your everyday market move.
In fact, it’s only happened 4 times before:
- 1991
- 1998
- 2008
- 2020
This signal represents a major change in investor psychology.
- Investors went from hating small-cap stocks to loving them very quickly.
- It’s like the market flipped a switch from “risk-off” to “risk-on”.
Why is this significant?
Small-cap stocks are:
- More sensitive to economic conditions
- Typically more volatile
- Often carry more debt and less cash reserves
In short, they thrive when the economy is strong but are the first to be dumped when things look shaky.
A Bullish Signal… Usually
Historically, this signal has been incredibly bullish.
3 out of 4 times, it occurred near the end of economic recessions. Even in 2020, it happened right after the recession ended.
Each time, it corresponded to excellent buying opportunities for US stocks in general.
But Wait, There’s a Catch
Today, the US economy isn’t coming out of a recession.
In fact, many would argue it’s closer to the next recession than the last one.
This makes today’s signal more similar to May 1999:
- The economy was closer to its next recession than its last.
- Small-caps had been viciously underperforming, similar to 2022-2024.
What Happened in 1999?
The 1999 signal wasn’t about economic recovery.
It was likely because:
- Large-caps had become too expensive relative to small-caps, just like today
- The underperformance of small-caps had simply run its course.
After the signal:
- Small-caps began to outperform heading into the 2001 recession.
- They outperformed even more following the recession’s end.
- The S&P 500 continued higher until March 2000.
The Bottom Line
All 4 historical signals led to a higher market in the following months.
In every case, small-caps outperformed the S&P 500 over multiple years.
This is why we’ve had a long trade on small-caps on our website since April 2024.
Small-cap stocks have become so unbelievably cheap relative to the rest of the market that the risk-reward of this trade is very attractive.
You can find all our 17 Active Trade Setups across 5 different assets here.
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