A Big Prediction for ‘Small’ Stocks

By TradeSmith Research Team

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When our team first asked in November 2022 if you would like to see more small-cap coverage, the answer was a resounding yes.

These are companies with market caps generally between $300 million and $2 billion, and they can make for attractive revenue-growth stories even when worries of a looming recession are high.

We can see the success of small-caps by looking at how stocks performed after the 1973 to 1975 recession.

When the economy began to recover in the spring of 1975, it was small-cap stocks that led the way one year later. While large-cap stocks offered a 28% return, small-cap stocks offered more than double that with a return of 58%.

And when I saw a prediction Quantum Edge Pro Editor Jason Bodner recently published, I had to make sure you saw it too.

Let’s get right into it so you can see Jason’s prediction.

Enjoy your Monday,

Keith Kaplan, CEO, TradeSmith

Prediction: It’s Time to Start Buying Small-Cap Stocks

I call it Bizarro World.

I can’t take credit for the name. It’s a nod to the fictional planet that DC Comics invented more than 50 years ago… a place where everything seemed to operate opposite of expectations.

Like we’re seeing with the stock market right now.

Investors are trying to figure out if “good news” is actually good for stocks – or if it’s bad in this weird market reality we’re all living through right now.

Want an example? The most recent Producer Price Index (PPI) report showed us that wholesale prices fell half a percent in December, which was more than expected.

That’s “good news,” right?

After all, inflation is The Enemy. We want prices out in the economy to drop. Taming inflation is the whole point of the Federal Reserve’s aggressive stance with interest rates.

In a normal world, that would be the view. In Bizarro World, however, the bigger-than-expected drop in prices triggered concerns about that aggressive Fed overshooting and tipping the economy into a full-blown recession.

You don’t need to be paralyzed by Bizarro World as the market comes to terms with swirling headwinds and stock prices.

Big Money is flowing into certain stocks right now, and there are opportunities for the taking…

Accurately Predicting Higher Prices

One of my early jobs as head of a trading desk for Cantor Fitzgerald gave me a unique vantage point to see how Big Money players buy stocks – and how that buying drives stock prices.

You see, institutions are different animals than individual investors when it comes to buying and selling stocks. We hit a few buttons on our computer or smartphone and – voila – we’re done.

But institutions, pension funds, and hedge-fund players manage tons of cash – meaning they have to buy huge blocks of a stock to “move the needle” in terms of fund performance.

If they bought all those shares at one time, the buying pressure would hit the stock like a hammer blow and drive it skyward in a matter of minutes. So they hush it up by spreading the purchases across different brokers and by stretching it out over days and weeks.

I not only had a front-row seat to this, but I was part of it. A pretty big part, as I discovered. My job was to match those Big Money buyers up with sellers. And because of the enormous number of shares involved, that takes quite a bit of work.

As I worked the phones – and played this role of stock-market matchmaker – I started to see the ripple effects created when Big Money comes into the market. Over time, I wrote an algorithm that is able to pore through the reams of data and tell me when Big Money is buying unusually large amounts of stock.

And this algorithm is powerful enough to tell me which markets, sectors, and specific stocks the Big Money will keep flowing into.

In short, this data-driven algorithm tells me stories.

About what to buy. About what to sell.

And about where the money is flowing next.

My algorithm is whispering a pretty great story about what investors should be buying now.

And it’s a story that most investors don’t know about yet. Which gives you a huge edge.

I’m talking about the looming bull market for small-cap stocks.

Smaller Is Bigger Right Now

So let me tell you how I see this… because my “system” is yielding a couple pieces of pretty important intelligence.

First, despite the whipsawing that stocks (and all of us) are taking, Big Money is flowing into certain sectors and types of stocks. That’s why you don’t need to wait for investors to snap out of their Bizarro World mindsets.

As part of my proprietary Quantum Score system, I developed a Big Money Index that tracks these stock-rocketing inflows of cash. We saw diminished buying from mid-December through the first 10 days of January. But those big fund managers have started pushing the “buy button” again. This chart shows you what I mean.

That’s helpful… but it’s not enough. What we really want to know is where that money is going. My system is like a radar device that locks onto “incoming” money.

So what can we learn from that incoming money?

If we look back over the last month, the first thing that jumps out in the chart below is that there are more than twice as many Big Money buy signals (blue bars) as sell signals (red bars). You can see that total in the far-right column.

But now comes the “money shot.”

Almost all of those blue “buy bars” are situated on the left side – meaning the money is flowing into companies with market values of $500 million to $50 billion.

We’re talking small caps… and mid caps.

In fact, the vast majority – I’m talking a full-on 85% – of those buy signals were concentrated in that under-$50-billion market-cap realm.

I’m a data guy, so 85% gets my attention.

It should get your attention, too. That’s a “right now” buy signal – clear and simple. It gives us a chance to make our moves – ahead of the masses.

And it makes sense – since there are reams of research that prove that small-cap stocks lead the charge out of a tough market (like the mess we’re extricating ourselves from now).

The bottom line here: I’m predicting a big surge in small-cap stocks.

To be clear, I am not suggesting you run out and buy any old small-cap or mid-cap stock.

You need to be much more strategic to reap the windfall I’m seeing.

Small-cap stocks offer hefty upsides because the underlying companies are innovative, nimble, opportunistic – and have much zippier growth.

That also makes them riskier ventures.

So you want to pick the big potential winners – companies with faster sales-and-profit growth and share-price momentum.

And out of that pool of prospects, you want to latch onto the stocks that the Big Money is buying.

If you’d like to hear more about my general outlook for the year ahead, you can access my free 2023 investing forecast video here.