Let’s simplify this small cap move…

A brief note on the small cap move

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What an explosive move from small-caps last week.

We got a momentum thrust:

When the 5-day rate of change crosses above 10%.

We got a breadth thrust:

78% of small-cap stocks made a 20-day high… this hit historic levels... The last time i spoke like this was back in 2020… and we just went higher than that!

Historically, small-caps follow through to the upside with these types of thrusts.

Don't believe me?

Here is the data:

The forward returns are very bullish.

When the Russell 2000 5-day rate of change crosses above 10% one year later, we have an average return of 34.7% (median: 20.8%).

However, with these types of huge momentum and breadth thrusts it might need some time to breathe.

Seasonality tells us that there might be some volatility and a pullback before going higher:

Maybe there will be a little shake-out to get some traders a little nervous.

Small-caps probably need a pause here.

If it ran up another 10-20% without taking a little pause, I would be a bit nervous.

By the way, this happened during a period that the Russell 2000 is in its third-longest streak without a new all-time high:

It’s been 676 days, and we are still 10% below those 2021 prior cycle highs.

If you think this move is too far too fast, have a look at the Russell 2000 performance one year off major lows:

The current move in the Russell 2000 is below its average versus other major market lows.

So, It's not too far too fast.

This move has legs, given the breadth that you're seeing.

Small caps are under-owned and underappreciated, and I think the overall expectations for the junkiest stocks in the market are pretty low.

So, what are you doing here…

Buying small caps?

Or

Selling small caps?

Let me know…

Before I finish up, always remember:

• Remain flexible.

• We can only work with the information that is available today.

• Keep an open mind.

• “I can't change the direction of the wind, but I can adjust my sails to always reach my destination.” — Jimmy Dean.

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Stay safe, and good luck out there…

GH

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