Gains Are Being Harvested and Redeployed

The record earnings of big technology stocks (i.e., “The Magnificent Seven”) sent prices upward. But it also caused an extremely narrow market.

At last measure, these handful of names amounted to 31.1% of the S&P 500. The super concentration meant the average stock underperformed even as the index rose:

Gains Are Being Harvested and Redeployed

But that all flipped last month. A softer inflation report caused a monster reversion trade in U.S. stocks from big tech to undervalued stocks of all kinds, including small- and mid-caps.

Now, nearly a third of stocks are outperforming the overall index and the average stock is now up:

“The Magnificent Seven” gains are being harvested and redeployed across the market. But where is the capital headed?

Well, since that July 10 inflation report, the Federal Reserve took an increasingly dovish stance. Together, this all signals an interest rate cut on the horizon.

As a result, money is heading towards other stocks, especially smaller companies who benefit greatly from lower rates, like those in the S&P 600 Small-Cap Index (as represented by the exchange-traded fund SPDR Portfolio S&P 600 Small Cap ETF (SPSM)).

The rotation is clear:

Small-cap cyclical sectors like financials, communication services, discretionary, and industrials are all way up.

Further Value for The Whole Market

This action created a rising tide.

Our proprietary Big Money Index, which is a netted moving average of Big Money buys and sells, makes it apparent when shown with the small-cap heavy Russell 2000 (as represented by the iShares Russell 2000 ETF (IWM)):

An upcoming rate cut (or cuts) along with a seemingly healthy economy should drive further value for the whole market, assuming there’s no recession.

In fact, since 1991, whenever the Fed lowers interest rates and the economy isn’t in recession then or a year later, the S&P 500 and Russell 2000 stage massive rallies:

That performance is fantastic. And for small-cap stocks, it’s downright glorious.

Mapping the Future Path

The small-cap cyclical trade is in full force. Ultra-crowded tech positions are being trimmed, creating monstrous demand for small-cap stocks.

That doesn’t mean tech is dead. Instead, it means there are fundamental reasons to own smaller companies. But with so many to choose from, mapping the future path is challenging.

MAPsignals data can help. It recently shifted gears, showing Big Money favoring small-cap powerhouses.

One example is industrials company Mueller Industries, Inc. (MLI), a top holding in SPSM. Per FactSet, in the last three years it’s grown sales by 16.2% and earnings by 89.2%.

No wonder MLI made our MAP Top 20 report three times this year so far.

An Incredible Opportunity

The long-awaited rotation is here.

It’s an incredible opportunity for stock pickers. Use a MAP to capitalize on stocks the media isn’t talking about…yet.

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 MLI at the time of publication.