Rev's Forum: Small-Caps Could Be a Big Deal If Rotation Continues

"Some things happen for a reason,

Others just come with the season."

--Anna Claudia Antunes

After a week of difficult price action, the major indices have spent the last three days regaining their footing. The bulls are ready to conclude that the uptrend is back on track and that it should continue into the end of the year. The bears still harbor doubts and are focused on the big-cap technology and momentum names that have struggled with some rotation before bouncing back last week.

While the indices do face some technical issues, there are two big factors that favor the bulls. The first is the news flow and the reaction to it. The second is positive seasonality into the end of the year.

News flow has provided a consistent tailwind for the bulls. The jobs news on Friday was celebrated and the market continues to spike every time there is positive progress on the tax bill.

This week we have the Fed interest rate announcement on Wednesday. It is widely anticipated that a quarter-point hike will be announced. The market has been unconcerned about rate hikes mainly because the Fed has not seen inflation as a problem and is in no big hurry to raise rates. With economic progress looking solid, the market can digest rate hikes with little problem.

We are likely to have more news on tax hikes this week, progress on repeal of Dodd- Frank and also talk about an infrastructure spending bill early next year. The potential for an infrastructure bill has created some action in steel, cement and various construction stocks. Watch for that to continue.

The news flow favors the bulls as the market never seems to fully discount positives. It keeps rallying on the same positives, which is probably due in part to computer algorithms that trade off the headlines and don't much care if the news is new.

The bulls also have the benefit of positive seasonality into the end of the year. Small-caps tend to outperform in particular. According to QuantifiableEdges.com, since 1988 the Russell 2000 ETF IWM has outperformed 79% of the time and has produced gains seven times the loses.

The overall market has a strong track record into the end of the year, but the small-cap outperformance is of particular interest as we already have been seeing rotation out of the bigger-cap FAANG names. If this rotation plays out further, the small-caps will be the place to be.

We have a positive open on the way and upbeat sentiment. The bitcoin hysteria continues and that is putting speculative traders in a good mood.

At the time of publication, Rev Shark had no positions in the stocks mentioned.