In today’s market, small caps are showing potential for investors looking to gain an edge. The chart of the small cap iShares Russell 2000 ETF (IWM) reveals that small caps have not yet reached their 2021 high, despite a rally in 2023. This presents an opportunity for investors to catch up.
There are several factors to consider when investing in small caps. First, IWM could be a catch-up trade, as small caps should have performed better than they have. The lack of high-flying AI stocks in IWM could explain this difference, or it could be a warning sign.
Small caps are also interest rate and economically sensitive. They tend to perform well when the Fed cuts rates and if there is no landing in the economy. Additionally, IWM includes many banks, so if there is no banking crisis, it should do well.
If the overall stock market maintains its gains, small caps provide an opportunity for investors. It’s important to keep an eye on upcoming events, such as the Fed speak and the release of the Consumer Price Index (CPI), which could impact the stock market. If CPI shows that inflation is continuing to come down, the S&P 500 will rally. However, if CPI is stronger than expected, it may lead to a rapid pullback in the stock market.
Momo gurus, who are known for running up the stock market, are already being proactive to prevent a selloff if the data shows that inflation is not coming down. Their new mantra is that stocks will go up even if inflation does not come down. However, it’s important to approach their advice with caution and consider other factors.
To protect your investments while participating in the upside, it’s recommended to maintain a protection band consisting of cash or Treasury bills, short-term tactical trades, and hedges. The specific allocation within this band will depend on your risk preference and age.
In terms of other market movements, money flows are positive in NVIDIA Corp (NVDA) and neutral in Apple Inc (AAPL), Amazon.com, Inc. (AMZN), Meta Platforms Inc (META), and Microsoft Corp (MSFT). Money flows are negative in Alphabet Inc Class C (GOOG) and Tesla Inc (TSLA), and mixed in SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust Series 1 (QQQ). The momo crowd is buying stocks in the early trade, while smart money is inactive.
In the gold market, the momo crowd is indecisive, while smart money is inactive. For oil, the momo crowd is also indecisive, and smart money is inactive. Bitcoin rallied to $48,795 but is pulling back slightly. Whales, who are known for their strategic moves, did not push bitcoin to $50,000 over the weekend.
In summary, small caps present an opportunity for investors to catch up, but there are several factors to consider. It’s important to stay informed about upcoming events and maintain a protection band to protect your investments while participating in the market’s upside.
