Two Reasons Small Caps Broke Out Last Week

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The great small-cap breakout hits a cooldown period… Where Jason Bodner’s Quantum Edge Pro system is finding the best small-cap ideas… Trump’s running mate is a boon for a few select sectors and a drag for others… CrowdStrike slams the brakes on the world’s IT…

Long-awaited buzz on lower interest rates – not to mention the near-universal agreement of a Trump victory in November – has sent the small-cap sector surging over the past couple weeks.

Take a look… Even after a cooldown on Thursday and Friday, the iShares S&P SmallCap 600 ETF (IJT) is still far outpacing large-caps (SPDR S&P 500 ETF, SPY), tech (Invesco Nasdaq 100 ETF, QQQ) and industrials (SPDR Dow Jones Industrial Average ETF, DIA):

This sea change has been a long time coming. Small-caps have been lagging the market for the better part of two years, ever since the Federal Reserve began the fastest rate-hiking campaign in history.

Now that most traders agree we’ll see the first cut at the September FOMC meeting, the market is pricing in outperformance for the most interest-rate-sensitive sector.

That chatter was the first punch. The second was Donald Trump’s rapidly rising election prospects… and how well small-caps did after the 2016 election.

We should also note the breakout in small-caps was especially rare. The Russell 2000 index rose more than 3% in a single trading day – something Jason Bodner recently pointed out has happened just 145 times since the Russell 2000 began trading in May 2000.

Here’s Jason writing to his Quantum Edge Pro subscribers…

Here are the average returns looking forward from when we see this rare signal:

You can see that gives us a high probability of this breakout gaining momentum.

Later in that same update, Jason showed his subscribers why election years are so bullish for small-cap stocks:

We’re also in an election year, and a potential boost to small-caps is a Trump win. This seems even more likely given the unfortunate and scary event that took place this weekend. I’m not a gambling man, but it’s worth noting that after the assassination attempt, betting odds for Biden dropped to 15% and rose to 64% for Trump – propelling him to front-runner status. And today alone, the Russell 2000 Index is up over 2%.

Here’s what happened to small-cap stocks when Trump won in 2016:

If Democrats do pull out a win, though, things are still in our favor. Here’s what happened to small-caps after Biden won in 2020:

Either way, if history repeats itself, small-cap stocks benefit during an election year… no matter who wins.

That’s the 1,000-foot view covered. The perfect storm that’s been brewing for small-caps all year long is finally about to make landfall.

The only question is what to buy…

❖ Jason’s Quantum Edge Hotlist gives us some clues…

This list is one of the most valuable perks of Jason’s Quantum Edge Pro advisory. It shows the top- and bottom-ranked stocks of his system every single week.

At the top are the highest-quality stocks trading in good technical patterns and with all the telltale signs of institutional investment. At the bottom are just the opposite – landmines nobody wants and you should steer clear of. Here’s last week’s list, courtesy of Jason:

The last time we looked at this list, the buys were dominated by semiconductor plays. Now, they’ve taken a backseat to more discretionary stocks like e.l.f. Beauty (ELF), Green Brick Partners (GRBK), and MakeMyTrip Ltd. (MMYT).

All these names are under $10 billion in market cap, so they’re definitely on the smaller side, especially compared to the behemoths in the “Magnificent 7.”

At the bottom of the list we have the long-time pariah of Big Money, Beyond (BYON), along with biopharma stocks Cassava Sciences (SAVA) and Takeda Pharmaceutical (TAK)… and Walgreens Boots Alliance (WBA), which has lost more than half of its value in 2024.

The newest iteration of this list should hit subscribers’ inboxes later today. So, if you’d like to take a look at the newest Big Money rankings, along with Jason’s latest update on the market and model portfolio, go here for more info on a subscription.

❖ Trump picked his running mate last week…

JD Vance, the memoirist-turned-venture capitalist-turned-politician, will now sit next to Donald Trump on the November ballot.

Unlike Trump’s previous vice president, Mike Pence – whose agenda seemed to be mostly socially conservative in nature – JD Vance has a broader set of policy ideas that align with Trump’s economic agenda and could make for big changes in markets.

The thing to understand about this ticket is how big a departure Trump was from the Republican establishment. For decades, Republicans represented non-interventionist leadership. Markets would sort out their own inefficiencies, punish bad actors, and capital would naturally flow toward where it’s needed – the government would have little say in the matter.

Trump represents a big leap from that towards populist, interventionist policy. Trump is happy to slap tariffs on imports, as he showed during his presidency and this campaign. Vance has joined in on that call, eyeing tariffs on steel to protect the Rust Belt that he comes from.

Vance has also joined with several Democrat lawmakers to try passing laws that limit the benefits CEOs gain from mergers and acquisitions, as well as praising the current Federal Trade Commission (FTC) for its efforts to block big tech mergers – even though they’ve largely failed.

One last noteworthy area where Trump and Vance agree is on digital assets. The latter has co-sponsored legislation in Congress meant to stop banks from disallowing crypto companies to do business with them.

What’s said on the campaign trail is very different from what could actually happen if Trump wins the presidency. But looking at this duo, we can expect major broad-based tariffs on materials from China, more Big Tech scrutiny, fewer regulations on fossil fuel companies, and potentially legislation that allows crypto to flourish.

We’ll keep a close eye on these sectors through the election… and see how the market reacts. But if you want to start investing now, look for high-quality fossil fuel stocks, buy bitcoin and bitcoin miners, and be very careful when investing in Chinese companies.

❖ CrowdStrike’s outage sends the stock plummeting… but it’s a buy…

It was hard to miss the chaos that erupted Friday morning.

A cybersecurity update from CrowdStrike (CRWD) halted an estimated one in five Windows machines across the world.

Multiple airlines completely grounded flights, 911 calls in New York and New Hampshire faced disruptions, and critical health care facilities lost functionality.

The event was like what Y2K was supposed to be – a global wipeout of digital infrastructure. It’s hard to discern how big the economic impact will prove to be in time.

As one would expect, CRWD stock got punished at Friday’s open. It fell 14.1% from the previous close and, as I write, has only recovered slightly on the day.

But if you ask me… this was a rare opportunity to buy a high-quality cybersecurity company on sale.

Think again about the scope of the impact. CrowdStrike’s error affected roughly 20% of the world’s computers. That tells us it’s an essential piece of software… and clearly, one that’s not easy to do without.

Further, the stock gets high marks on TradeSmith’s two key ratings systems. On the Business Quality Score, CRWD gets an 81 out of 100, as of Friday. The biggest ding it gets is due to its lack of a dividend… otherwise it’d rate much higher on the fundamentals.

Jason Bodner’s Quantum Edge system agrees, giving CRWD a 70.7 and landing it right in the middle of the “sweet spot” where stocks are a great buy:

We showed you last week how increasingly important cybersecurity companies are, in a world that’s dominated by proprietary software that’s near impossible to wean off of.

This wasn’t a cyberattack; it was an error. So, the fact that CrowdStrike was able to quickly correct it should attest to both its competence and its presence throughout the computing world.

If you’re a current CRWD shareholder and irked by last week’s events, consider averaging in at a better price that may not last. And if you have no cybersecurity exposure in your portfolio, give the stock a closer look.

To your health and wealth,

Michael Salvatore
Editor, TradeSmith Daily