The Wall Street story of 2023 was the mega-cap tech-heavy Nasdaq 100 Index (QQQ), which rose a robust 50% and were supported by members of the “Magnificent 7” stocks such as Microsoft (MSFT) and Meta-platforms (META). Bolstered by the AI revolution, technology stocks such as Nvidia (NVDA) and Advanced Micro Devices (AMD) showed little sign of slowing as each hit fresh 52-week highs on Tuesday. However, since the best performers rarely achieve back-to-back best performances, investors looking at historical data may want to keep an open mind to other market areas. For example, growth stocks led the way in 2023, commodities in 2022, and large-cap stocks in 2021. This begs the question, is it time to take a closer look at small stocks in 2024?
Reversion to the Mean Potential
Until the Russell 200 Index hit fresh 52-week highs late last year, the index had gone more than 500 days without making a 52-week high – its worst drought ever (longer than the Internet Bubble and the Global Financial Crisis !). The significant underperformance sets up a possible reversion to the average trade, that is a trade placed with the strategy of anticipating that the price of an asset, which deviates significantly from its historical average, will return to that average.
Image source: SentimentTrader, Russell Investments
Strength Begets Strength
The Russell 2000 gained 21.9% in the two months ending in 2023 — some of its strongest two-month gains ever. Since 1982, the Russell 2000 has gained more than 18.5% in 11 cases. In 100% of the cases, the Russell was higher six months later for an average gain of 19.2%. In other words, historical data supports the business.
Image source: Ryan Detrick, Carson Research
Technical Configuration
After three straight weeks of pulling back, the Russell 2000 Index ETF (IWM) approaches an attractive zone of reward to risk (the 1St a pullback to its 10-week moving average).
Image source: TradingView
Dovish Fed Favors Small Caps
The CME Group’s FedWatch tool indicates that market participants anticipate six interest rate hikes in 2024. Lower interest rates are generally considered better for small-cap stocks because they reduce the cost of borrowing for businesses. Small companies often rely on loans to finance their operations and expansion. When interest rates are lower, these companies can access capital at a more affordable rate, leading to lower interest rates and improved profit margins.
Bottom Line
Mega-cap technology stocks enjoyed a positive off year in 2024. However, investors may want to explore other market areas in 2024, especially small-cap stocks. Evidence to the long side is increasing, including reversion to the mean potential, momentum signals and a high reward to risk technical zone.
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Advanced Micro Devices, Inc. (AMD): Free Analysis Report
Microsoft Corporation (MSFT): Free Analysis Report
NVIDIA Corporation (NVDA): Free Analysis Report
Invesco QQQ (QQQ): ETF Research Reports
iShares Russell 2000 ETF (IWM): ETF Research Reports
Meta Platforms, Inc. (META): Free Analysis Report
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