Small-Caps Join the All-Time High Party, But Is That Cause for Concern?

In the wake of the Fed’s interest rate cut, the senior indexes hit new all-time highs, but this time the Russell 2000 IWM joined the celebration. All four of the major indexes were at all-time highs for the first time since November 2021.

While some investors were concerned that the Fed’s much-anticipated rate cut would produce a sell-the-news reaction, after a small amount of volatility, the positive momentum continued and spread to the smaller stocks. Big-cap technology lagged as money flowed into the many small-caps that have lagged and are not as extended or as expensive as the larger names that have been leading for years.

The big question now is whether the small-caps can continue to close the performance gap with the rest of the market. Lower interest rates are giving the group a major boost, and stock pickers are looking hard for names that offer good technical setups and strong growth.

In recent years, the small-cap group has had a few periods of outperformance, but unable to sustain that for long. Investors always moved back to the "safety" of the familiar Magnificent Seven MAGS stocks. Will it be different this time, with lower interest rates serving as a catalyst? Maybe. 

My game plan is to increase my efforts in finding small stocks that have been overlooked and may attract attention as the broader market looks for increased small-cap exposure. Price action is key, and there are likely to be positive catalysts as we head into the third-quarter earnings season.

The market’s reaction to the Fed is a good reminder of the danger of constantly trying to time a market top. There were plenty of logical reasons why there could be a selloff on the news, but the market always does its best to frustrate as many folks as possible.

The failure of the sell-the-news scenario creates a large supply of underinvested folks who will provide support. Don’t look for a sudden market collapse, especially as expectations for third-quarter earnings start to build.

I’ll be focused on stock picking and trying to find charts that offer good entry points.

We have a mixed start as investors await news of a telephone call between President Trump and President Xi, which may resolve the long-running drama over TikTok and could lead to other progress on trade.

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