Small Caps Are Set for a Massive 34% Rally

By Brett Eversole

Even the best tools for analysis break down more often than we'd like.

Valuation is a useful metric... But it can lead you astray at certain times. Negative sentiment is powerful as well... But a group of hated stocks can always fall further out of favor.

There's one thing in this mixed-up world that you can almost always count on, though...

To succeed in the markets, you need to trust the trend.

One of the simplest ways to make money is to stick to what's working... and buy what's already going up.

Today, we have more proof of this, courtesy of small caps. These stocks have soared in recent weeks, rising 18.6% in just 23 trading days. And based on history, we can expect another 34% gain from here.

Let me explain...

Stocks in general went on a tear in recent weeks. Most markets bottomed in mid-June. And the following two months of gains have been impressive... including a 17% gain for the S&P 500 Index.

Small caps led the major indexes, though. They climbed 23% from their June bottom to the recent high. And even more impressive was their performance over 23 of those trading days.

Specifically, the Russell 2000 Index – the small-cap benchmark – was up 18.6% from July 14 through August 16. That's a massive move in a short period, even for a typically volatile group of stocks.

You can see the overall two-month rally in the following chart. Take a look...

Small caps are still well below last year's high. But this is a strong signal that the bear market could be over. History agrees...

This recent 23-trading-day rally is extreme compared with similar runs in the last three decades. We've only seen 49 other instances since 1990. That's just 0.6% of the time.

More important than the rarity, though, is what happens next. No surprise, the trend tends to continue...

Small-cap stocks have roughly kept up with the overall market since 1990, rising 8.8% per year. But you can do much better by buying at the start of a new uptrend...

Similar setups led to 7.1% gains in three months, 17.2% gains in six months, and an incredible 34% gain over the next year. What's more impressive, small caps were higher a year later 98% of the time.

Nothing is certain, of course. And it's still possible that we're in the middle of a bear market rally. But every day the market goes up, that possibility weakens. And according to this setup, we could be on the verge of a major move higher in small-cap stocks.

Good investing,

Brett Eversole

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