2 Rare Signals will Power Small-Caps to All-Time Highs

Late summer twists and turns keep investors on their toes.

While pundits debate the merit of rate cuts, left behind smaller companies are thriving.

Today we’ll discuss why 2 rare signals will power small-caps to all-time highs.

It often makes sense to look back to see the future.

One month ago we prepared you for a small-cap revival once the Fed cuts interest rates.

When the rate-noose loosens, smaller less capitalized firms thrive.

Then, just 2 weeks ago, we offered 2 power thrust signals that forecast healthy gains for the left-behind group.

In that same vein, we’ll add to these calls with fresh ammo. Last week’s Jackson Hole event sent a wave of capital into the under-owned group.

And we’ll offer an additional study highlighting why the upcoming rate cut is not only rare…but also a great omen for small-caps.

The market is broadening…and this is a great situation for new leadership in the months ahead.

2 Rare Signals will Power Small-Caps to All-Time Highs

The Jackson Hole event on August 22^nd sent waves through markets. Powell’s comments suggesting the shifting balance of risks may warrant adjusting policy.

Those 9 words kicked-off a risk-on rally that is still in play today.

From last Friday, the large-cap S&P 500 has jumped 1.75%…which pales in comparison to the Russell 2000’s lead of 4.38%:

Now, this surge may appear as a tide lifting all boats. However, under the surface of this thrust, it’s clear that gobs of capital is pouring into small-caps.

By viewing the equity inflows and outflows from August 22^nd through August 27^th, we can see a total of 495 stocks under accumulation.

Incredibly, 445 or 90% of those inflows are in companies sized $50 billion and lower. This highlights a broadening rally:

But let’s take this thrust a step further. Friday’s rally alone was epic with the S&P Small Cap 600 jumping 3.8% alone.

Portfolios loaded with smaller health care, financial, industrial, and discretionary names were screaming:

Turns out this level of thrust is rare…and bullish.

Since March 2009, a daily jump of 3.8% or more for the S&P Small Cap 600 has occurred 51 times.

Here’s how the index performs afterwards:

• 3-months later small-caps jump 12.3% on average
• 6-months later small-caps fly 22.3%
• 12-months later smaller stocks zoom with 47.8% average gains

I’ve also included this signal post 2020 for some nearer-term context. Over the past 5 years, this signal has worked too:

This power thrust signal alone suggests new all-time highs are in store for smaller stocks.

Let’s also unpack this from another angle.

If the Fed comes through and slashes rates next month, that means that just over 9 months have passed since the last rate cut.

I went back and studied pauses between rate cuts.

When the Fed restarts cutting rates after at least 5 months have passed, this has been a very bullish omen for all stock sizes.

But small-caps in particular see elevated returns.

When the Fed restarts rate cuts after at least 5 months have passed, the S&P Small Cap 600 performs as follows:

• 3-month average returns of -.1%
• 6-month gains of 5%
• 12-month gains of 24%
• 24-month average gains of 44%

Folks, we are entering a golden age for small-caps.

This means that stocks outside of the Mag 7 not only will work…they need to be part of your portfolio allocation.

And our data has shown continual money flows pouring into the group all month.

Don’t wait for the media bull whistle to get excited about small-caps…by then the train will have left the station.

Be early to the wave with MoneyFlows!

If you’re looking to upgrade your research, now is a wonderful time to become a PRO member and gain access to our unique data, highlighting the highest scoring stocks under constant accumulation.

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The small-cap revolution is here.

Don’t waste this opportunity by owning low-quality stocks.

Own the best names loved by institutional investors.

Go with the flows!