Small-caps do NOT matter

JC Parets
May 7, 2024

The Small-cap Indexes in America have had a tough time for a while now.

Since the start of 2022, both of these Small-cap Indexes have actually produced a negative return.

The S&P600 Small-cap Index requires companies to have a track record of earnings in order to be included in the index.

The Russell2000 lets anyone in. It doesn't matter how much money you lose, if your market cap is above $300 Million, then you're in.

Both of them have been terrible.

Now remember, it's not a requirement for Small-caps to outperform in order for the stock market to be in a healthy environment.

Keep in mind that these small-caps, particularly the Russell2000, are the worst and least relevant companies on the planet.

They also regularly kick out all their best players.

You'll have a hard time finding a worse group of companies out there.

In fact, these stocks are so irrelevant, that Microsoft alone is worth more than the entire Russell2000 index combined.

They just don't matter.

BUT, as investors, the fact that these indexes have struggled for so long, allows for the best and the strongest to rise to the top.

No matter how bad small-caps are doing as a group, you'll still regularly find names that are bucking the trend.

Here's how we do it.

When it comes to correlations, you'll also find that individual small-cap stocks move less in line with the indexes, vs a lot of larger-cap stocks that tend to be more impacted by movements in the major averages.

Small-caps are a great pond to go fishing in, not just now, but always.

It doesn't matter that they don't matter.

We're allowed to keep the profits, even if the company doesn't even earn money.

Their C-suite and employees are not our problem. The profits from the changes in the stock price are the only thing that matters.

That gets forgotten quite often, so I'm here to remind you that what's going on in the company itself is NOT our concern.

We'll leave that for others to worry about.

Our Minor Leaguers are one of my favorite groups of stocks. The idea is to try to catch these names before they get "called up to the bigs".

We change the rules for Small-caps a bit, increasing the market-cap requirement to $1 Billion and increasing the ceiling to $4 Billion.

And then we just sort by relative strength, allowing for the cream to rise to the top!

Check out this week's full Minor Leaguers Report and Trade Ideas here.

JC

LIVE Conference Call Replay

Last week was our Monthly Charts Strategy Session for Premium Members of ASC.

This is where we go over all the market's most important trends, highlighting our favorite trades and strategies for May.

Watch the replay here and download all the charts.

 

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