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2024: Year of the Small Caps

After the big 7 bubbled, Russell 2000 kicks up...

The MARKET is tipping its hand, reckons Greg Guenther in Addison Wiggin's The Daily Reckoning.

If you pay close attention, you'll begin to see the signs of a massive rotation in stocks – a phenomenon most investors will ignore until it's too late.

If you catch these moves early, you have the chance to pull in impressive returns. As this rotation rally extends, I'm betting one sector could double up the S&P 500 during the first six months of 2024.

Best of all, you can achieve these market-beating gains with a simple buy-and-hold trade.

I'll show you how in just a minute, But first, you need to understand what's happening under the surface of the major averages.

This rotation trade begins with the mega-cap stocks – names like NVIDIA Corp. (NVDA), Microsoft Corp. (MSFT), and Meta Platforms Inc. (META). The Jim Cramer-dubbed Magnificent Seven "finished 2022 down 40%," reports the Wall Street Journal, "losing $4.7 trillion in combined market value, whereas the remaining stocks in the S&P 500 dropped 12%."

But the Magnificent Seven have once again bubbled back to the top of the market following last year's brutal performance. Now, analysts and pundits are sounding alarms as these mega-caps are once again dominating the market, with Goldman Sachs noting the group has grown to a whopping 30% of the S&P 500.

For the record, surging mega-caps are not setting off alarm bells for the market at-large. But I don't think they are going to experience the same level of market domination in 2024. No, it's not likely market-leading NVDA is going to rally another 250% next year. It probably won't crash – but I sincerely doubt we'll see a repeat performance of 2023's historic performance.

Instead of an impending crash due to a top-heavy market, we're seeing the beginning of a rotation away from mega-caps into tech laggards and small-cap stocks – a rotation that has become more pronounced over the past week.

Last week, the Fed elected to hold rates steady. The market was expecting no action – so that's not what sparked the rally. Instead, the Fed's dovish comments started the feeding frenzy. Powell declared that inflation has eased (finally) and market participants can expect it to be less of a problem in 2024.

How you personally feel about these comments or the probability of a so-called "soft landing" doesn't matter. What's important is how the market interpreted the news, and this is the message stock sent:

For starters, hikes are likely done. And it's becoming very likely that we'll see some cuts next year, possibly as early as March. More importantly, this Fed meeting was the last real obstacle for the melt-up rally to scale into year-end. I don't see anything else on the calendar standing in our way as 2024 approaches.

The Nasdaq Composite, S&P and Dow all jumped about 1.4% following the release of the Fed minutes. And the good vibes continued through the end of the week.

More importantly, small-caps exploded higher as many of the Magnificent Seven stocks failed to keep up. Instead of NVDA hogging the headlines, we watched smaller names and forgotten growth stocks plow higher in dramatic fashion.

The Russell 2000 rallied a staggering 3.5% on Fed Day. And it didn't stop there.

By the end of the week, the small-cap index rallied 5.5% to post its fifth green week in a row. This is the same index that was breaking to lows not seen since late 2020 during the final week of October. Seven weeks later, the Russell 2000 is now working on a significant breakout.

One more important note: The Russell 2000 has grossly underperformed the major averages for nearly two years. While the biggest of the big remained stable presences in the market, the Russell was hit hard by the regional banking crisis earlier this year, and failed to rally with the major averages into the summer months.

It also experienced a hard reset from August through October that led to a drop of more than 17%. Most mega-caps were stable during this period while smaller names took a beating, acting as a de facto safe haven for investors worried about the potential for a bigger drawdown heading into the fourth quarter.

But as more investors piled onto the bearish side of the boat, the market suddenly shot higher. The Russell 2000 abruptly reversed off its lows, and a powerful melt-up move emerged.

Despite its incredible 20%-plus rally that began at the start of November, the Russell 2000 is just now attacking the top of its range. A breakout above 200 in IWM would be huge – and would set the stage for a catch-up move that could lead to small-caps quickly outperforming the big boys during the first half of 2024.

You don't need to employ any complicated strategies to take advantage of a small-cap snapback. Simply snag a few shares of the iShares Russell 2000 ETF (IWM) and you have an excellent chance to double the performance of the S&P 500 during the first half of 2024.

Publisher of Agora Financial, Addison Wiggin is also editorial director of The Daily Reckoning. He is the author, with Bill Bonner, of the international bestsellers Financial Reckoning Day and Empire of Debt, and best-selling author of The Demise of the Dollar.

Addison Wiggin articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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