No matter how you slice it, small and mid caps have been absolutely crushed on a relative basis since 2021. The unfortunate part about this is that most traders have recency bias. They believe whatever has been working will continue to work and things that haven’t been working should continue to be ignored. If you study stock market history, you know this isn’t how it works.
First, I want you to look at a small cap vs. large cap relative ratio (IWM:SPY) since the turn of the century:
It’s rather clear that small caps have been completely out of favor for the past 3 years. And this is what traders know and remember. But if we step back and look at the Big Picture, then we realize that there are times when small caps absolutely TROUNCE large caps. I believe we’re entering one of those bullish periods and I circled the recent action to illustrate it. While small caps have seen a big jump recently, this charts demonstrates that if this period of small cap leadership is just beginning, things could get VERY exciting into year end and throughout 2025. Shouldn’t we at least entertain this idea? For further confirmation of a major shift into small caps, watch the July relative high near 0.41. If that level is cleared, the odds of a much more significant rotation into small caps increase significantly.
I began discussing small cap outperformance all the way back in January 2024 at our MarketVision 2024 event where I laid out my themes for 2024. I indicated that the Fed’s lowering of the fed funds rate would send the small and mid cap spaces flying, which it has, though it was delayed as a result of the Fed keeping rates “higher for longer”. The stock market began anticipating a much lower fed funds rate back in July, when the June Core CPI came in much better than expected. Small caps RIPPED to the upside with the IWM outperforming the QQQ by 18 percentage points in just a little over two weeks – rapid and violent rotation that, in my opinion, predicted much more rotation to small and mid caps ahead. We’re now seeing that.
At EarningsBeats.com, we “draft” 10 equal-weighted stocks into our portfolios every quarter. At our draft on August 19th, we loaded our Aggressive Portfolio with small and mid cap stocks in anticipation of leadership in those asset classes. Our Aggressive Portfolio results were very impressive:
The S&P 500, from August 19th through the update on November 15th, gained 4.68%, but our Aggressive Portfolio scorched higher by 25.75%. That type of outperformance can make a big difference in your financial future. On Monday night, we announced the stocks that would be part of our Aggressive Portfolio for the next 90 days. Thus far, it’s a small sample, but results have been equally impressive:
After quintupling the S&P 500 in the prior quarter, our Aggressive Portfolio has upped its relative performance and currently is sextupling the S&P 500’s performance. One stock in this portfolio is Lemonade (LMND). When we announced our Aggressive Portfolio stocks that we “drafted” on Monday, LMND had just closed at 34.31. By Thursday, LMND had surged to an intraday high of 52.22, representing more than a 50% move in less than 3 days! While we certainly don’t expect this type of outperformance, it does underscore the possibilities when small and mid caps get on a roll and are seeing money rotate into these asset classes. Another stock in this Portfolio jumped nearly 25% and a couple others had gained more than 10%.
Learn More About Small and Mid Cap Stocks
Last weekend, I offered our FREE EB Digest subscribers a Special Offer. I produced a video highlighting a chart that is SCREAMING at us to buy small and mid cap stocks, along with 10 small and mid cap stocks that I really like. Some of these 10 made it into our Portfolios that were announced on Monday. I’m happy to extend this offer. Anyone that would like a copy of this Small and Mid Cap recording and also would like to see ALL of the stocks that are now in our Portfolios, CLICK HERE to start your 30-day FREE trial to our EB service. There’s a very simple fundamental reason why we’re seeing this shift into small and mid caps and I show you on the Small and Mid Cap recording. If I continue to be correct about this small and mid cap explosion, it’ll likely turn out to be your best decision of 2024. Kick the tires at EarningsBeats.com, check out our small and mid cap favorites, and get ready to improve your trading results!
It’s also the start of our Fall Special. Therefore, signing up for a FREE 30-day trial makes a ton of sense right now. If you like our service, you’ll have the opportunity to save $200 on our annual membership under the Fall Special. An annual membership will include your FREE registration into our MarketVision 2025 event in January, priced at more than $500 for non-members.
YouTube Show
Finally, my weekly market report, “Here’s Why Small and Mid Caps Will Keep Flying!”, was updated earlier and is now available on YouTube. Please “Like” the video and “Subscribe” to our YouTube channel as we continue to build our online community! Thanks so much for your support!
Happy trading!
Tom
Tom Bowley is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market.
