A Monster Reversion Trade in U.S. Stocks

Last month I mentioned the unpopular laggards will have their day again due to the overweight nature of some big technology companies in the market. Well, it looks like that day has come.

Two large-cap weighted benchmarks, the S&P 500 and the Nasdaq 100 (as represented by by the Invesco QQQ Trust Series 1 (QQQ) exchange-traded fund), have faltered recently.

Meanwhile, small stocks have flourished.

The S&P Small-Cap 600 (a proxy is the iShares Core S&P Small-Cap ETF (IJR)) and the Russell 2000 (as represented by the iShares Russell 2000 ETF (IWM)) have vaulted. IWM soared 11.31% in just a handful of days:

A Monster Reversion Trade

This is a monster reversion trade out of mega-cap tech stocks and into unloved small-cap stocks. For example, on July 11, IWM gained 3.59% while QQQ fell 2.19%. That 5.79% spread in favor of small-cap stocks is a historic move that’s only been topped twice.

What sent this reshuffling into high gear was the June consumer price index report, which showed the battle against inflation is essentially won. It provided a green light for the Federal Reserve to cut interest rates.

High interest rates have been punishing undercapitalized small-cap companies and rewarding large-cap firms flush with cash. Lower rates will ease funding burdens for smaller companies and make big companies’ cash generate less income.

There have been 23 instances of the IWM/QQQ spread being at least 4%. Afterwards, the average forward performance for each is astounding. Six months later, IWM gained 5.7%, while QQQ fell 7.3%. And a year later, IWM jumped 13.6% as QQQ dropped 4.2%:

Room For This Rotation to Continue

Looking at the flow of money, there’s room for this rotation to continue.

MAPsignals’ proprietary Big Money Index (BMI), a 25-day moving average of netted Big Money buys and sells, is firmly in an uptrend and far from overbought. Look at the most recent path and how it mirrors IWM:

From July 11-17, 1,058 stocks were bought by Big Money. Of those, 93% were in equities of $50 billion or less:

This is why I said you should buy small-cap stocks now back in May.

Leading The Market’s Next Leg Higher

Cyclical areas like financials, industrials, discretionary, and energy are under heavy Big Money accumulation. The stocks with the best earnings outlooks in these groups will be leading the market’s next leg higher.

One smaller stock seeing Big Money interest lately is consumer financial services company Synchrony Financial (SYF). Per FactSet, it’s grown sales 31.4% in a year and has three-year earnings growth of 64.2%. No wonder it’s drawn Big Money interest this year:

In fact, SYF made our MAP Top 20 report twice this month so far.

New Leaders Will Emerge

The bottom line is this reversion trade is just getting started.

New leaders will emerge. Use a MAP to find them. MAPsignals data reveals tomorrow’s winners today.

If you’re a serious investor, Registered Investment Advisor (RIA), or a money manager looking for hedge-fund quality research, get started with a MAP PRO subscription today.

Disclosure: the author holds no positions in SYF at the time of publication.