From the desk of Steve Strazza @Sstrazza
Welcome to our latest Minor Leaguers report.
We've had some great trades come out of this small-cap-focused column since we launched it back in 2020 and started rotating it with our flagship bottom-up scan, Under the Hood.
For the first year or so, we focused only on Russell 2000 stocks with a market cap between $1 and $2B.
That was fun, but we wanted to branch out a bit and allow some new stocks to find their way onto our list.
We expanded our universe to include some mid-caps.
To make the cut for our Minor Leaguers list, a company must have a market cap between $1 and $4B.
And it doesn't have to be a Russell component — it can be any US-listed equity. With participation expanding around the globe, we want all those ADRs in our universe.
The same price and liquidity filters are applied. Then, as always, we sort by proximity to new highs in order to focus on the best players.
But, instead of all-time highs, we're sorting by 52-week highs these days, as we don't want to discriminate against energy or other cyclical stocks.
The goal is still to catch the strongest names while they're small and have serious upside potential. If any of these stocks ever climb the ranks to the big leagues, the returns could be huge.
We're looking at up to 10x moves just to break into large-cap land!
Before we dive in and discuss some of the hottest stocks in the Minor Leagues, let's set the stage with an analysis of the overall market.
Believe it or not, the Russell 2000 $IWM is trading at almost the exact same level today as it was six months ago. The index is unchanged since first testing those all-important prior-cycle highs back in May.
The 2018 and 2020 highs represent a natural polarity zone, so it is no surprise that buyers continue to show up and defend them. The multiple tests of this level, and subsequent basing action, have resulted in a potential bullish momentum divergence in the weekly RSI-14. This is illustrated by the higher lows in momentum in the lower pane, coinciding with slightly lower weekly closing lows in price.
There's been an abundance of potential bullish divergences in daily momentum indicators this year. Most of them have either never been confirmed or never materialized into anything... aside from more selling.
However, weekly momentum divergences like the one shown above are far more rare. An extensive amount of basing is required for these divergences to form in the first place so they tend to be powerful signals. In the entire history of the Russell 2000, for example, we've only seen a momentum divergence similar to this one at the financial crisis lows in 2009.
* There were also small bullish divergences at the 1998 and 2011 troughs, but the lows in these examples only took place about a month apart. The retest lows this year and in 2009 were 4 and 5 months apart, respectively.
Not only have small caps been working on what looks like a durable bottom on an absolute basis, but the Russell 2000 has also been exhibiting impressive relative strength all year long.
Here it is resolving higher from a bearish-to-bullish reversal pattern versus its large-cap peers in the Russell 1000 $IWB:
So long as this is a valid base breakout - which it certainly appears to be - we're looking at further outperformance from small caps in the future.
In looking for long opportunities in the space, we want to pay extra close attention to those names that have shown relative strength through the recent volatility. It’s normal for the strongest stocks during periods of weakness to emerge as leaders when the selling pressure subsides.
Let's take a look at this week's table:
*Click to enlarge view
Since we sort our list by proximity to 52-week highs, the names toward the top are potential future leaders. They're not just exhibiting impressive relative strength. They're also making new highs on an absolute basis.
With that as our backdrop, let's take the field and highlight this week's top players!
Batter up…
