Small cap stocks have been struggling this year, with the Russell 2000 underperforming and declining by two percent. While the S&P 500, Dow, and Nasdaq 100 have been reaching new all-time highs, small caps have been left behind. However, market technician Katie Stockton from Fairlead Strategies believes that this underperformance is just a temporary setback. She is convinced that small caps will have a better year ahead after a challenging period of weak breadth.
The decline of the Russell 2000 has shaken investors’ confidence in small caps. To address this, Stockton aims to restore confidence by highlighting the positive signs. Despite the short-term oversold condition, she notes that the Russell 2000 ETF (IWM) has shown improvement in relative performance compared to the S&P 500. This indicates a potential turnaround for small cap stocks.
One reason for optimism is the strong performance of the Russell 2000 in the fourth quarter of the previous year. It rallied by almost 14% during that period, with a notable breakout in trading range for IWM. This suggests that there is still potential for small cap stocks to regain momentum and make a comeback.
While small cap stocks may face more volatility compared to large cap stocks, they also offer significant potential for growth. Smaller companies often have more room to expand and innovate, which can lead to higher returns for investors. Additionally, small caps tend to be less followed and analyzed by Wall Street analysts, which means there may be more opportunities to find undervalued stocks.
Investing in small caps should be part of a well-diversified portfolio. Diversification across different asset classes can help mitigate risks and ensure a more balanced investment strategy. By including small cap stocks alongside large caps and other investment options, investors can benefit from the potential growth while spreading out their risk.
When investing in small caps, it’s important to conduct thorough research and analysis. Due diligence is key in identifying companies with strong fundamentals and growth potential. Factors to consider include the company’s financial health, competitive advantage, industry trends, and management team. Investing in small cap stocks requires a long-term outlook and patience, as it may take time for these companies to realize their full potential.
While small cap stocks have faced challenges in recent times, there are signs pointing to a potential turnaround. Market technician Katie Stockton believes that small caps will see a better year ahead, backed by improved relative performance and the momentum from a strong fourth quarter. Investing in small caps can offer growth opportunities that are not always available with larger, more established companies. However, it is important to approach small cap investing with caution and ensure proper diversification to manage risks effectively.
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