Small-cap stocks have gained in recent weeks with the Russell 2000 outpacing other major indexes.
A market strategist thinks the make-up trade is just beginning and there is more room to run.
What Happened: For several months, Freedom Capital Markets Chief Global Strategist Jay Woods has been suggesting there could be a make-up trade of small caps with the Russell 2000 index underperforming the S&P 500 and other major indexes.
In an interview with Benzinga, Woods asks "What took so long?"
Woods said as a market technician, he saw lots of consolidation in small caps and knew the Fed was done raising rates.
Small caps had a rally to end 2023 going up 27% in eight weeks, Woods added.
"We're seeing it happen again and we're seeing it happen on a major breakout," Woods told Benzinga.
The iShares Russell 2000 ETF IWM is up 10.9% over the last month, outperforming the 1.7% return of the SPDR S&P 500 ETF SPY, the -0.9% return of the Invesco QQQ Trust QQQ and the 5.8% return of the SPDR Dow Jones Industrial Average ETF DIA.
Woods said the Russell 2000 is within 8% of its all-time high, which comes as every other major index has been making all-time highs.
"That is an easy upside target. Time for the Russell to join the party."
Momentum in small caps could continue into the first expected Fed rate cut. Woods cautioned that small caps could then take a breather in a "buy the rumor, sell the news" move.
Read Also: Small Cap Stocks Are Having A Moment: Russell 2000 Notches Best 5-Day Rally In Over 4 Years
Why It's Important: Woods said the recent gains of small caps are coming as the money's not leaving the market, money is leaving specific sectors.
Money from sectors that outperformed (technology, communications, consumer discretionary) is now moving to sectors that underperformed in the first half of the year (financials, real estate), Woods added.
"The overall market's not selling off, just moving money around," Woods said.
Woods said that investors are "bargain shopping" and redistributing their portfolios.
Going forward, Woods said small caps and the underperforming sectors still have room to run.
"Rotation in small caps is just starting."
One of the best-performing stocks over the last year is NVIDIA Corporation NVDA.
While money may be moving from Nvidia elsewhere, Woods still believes technology and artificial intelligence are growth sectors.
"I still think they're going to outpace as far as growth goes."
Nvidia and Broadcom AVGO report quarterly earnings in August. Woods said there won't be a lot of actual news and growth numbers until these reports.
"You're going to see some severe volatility."
IWM, SPY, QQQ, DIA Price Action: Here is a look at the current one-year and year-to-date return of the ETFs that track the major stock market indexes:
IWM: 1-Year: +14.8%, YTD: +10.7%
SPY: 1-Year: +23.5%, YTD: +17.2%
QQQ: 1-Year: +25.6%, YTD: +17.3%
DIA: 1-year: +19.1%, YTD: +9.3%
Read Next:
Interested in learning more about small-cap stocks and ETFs? Then you don’t want to miss Benzinga Small Cap Conference, Oct. 10 in Chicago. Click here for more information.
Photo: iConcept via Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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