Founder’s Note: We’ll see you at 11 am ET for the first-ever Chartapalooza! And there’s still time to request your favorite chart… – JC
Nobody likes the small-caps.
In fact, it seems like everywhere I go, people just hate them.
You see, humans have this very classic flaw that we call “recency bias.”
“Recency bias” is putting too much weight on the latest headlines or price action and ignoring the bigger picture.
Because fresh events are easier to remember, humans end up overvaluing them – even if they’re less important or reliable than the full set of data.
If you’re looking for an example of this “heuristic,” as we call them, look no further than the small-cap indexes.
You can see both the Russell 2000 and the S&P Small-Cap 600 Index making no progress since early 2021:
Everybody’s relying on the most readily accessible information rather than considering the broader range of historical data.
That’s often because it’s simply more difficult to find.
But, since we do this all day every day, we have the data. And this is why we’ve been buying small-caps.
Not only do we not allow ourselves to fall victim to this human flaw.
We understand it, we flip it on its head, and then we exploit the weaker, or more ignorant humans, for our own selfish profits.
Fundamentals Don’t Matter
Want to see something hilarious?
In order to be included in the S&P Small-Cap 600 Index, a company must show a track record of profitability.
The index is designed to track companies that meet specific inclusion criteria to ensure they’re both liquid and financially viable.
The Russell 2000 will let anyone in, no matter how much money they’re losing.
Despite these “important” differences in their construction, they trade exactly the same.
Take a look at the chart above one more time.
Imagine going through all that trouble looking for “good fundamentals” when the market is showing you it doesn’t care.
If the market doesn’t care, I don’t care.
Small-Caps Leading
Many of the small-cap stocks have already been working.
Small-cap Industrials, for example, closed the month of August at their highest level ever.
Small-cap Technology is on pace to do exactly that for the month of September.
These are offensive groups leading these stocks higher.
Take a look at some of the returns among small-cap indexes since the April lows:
Small-cap Consumer Discretionary is up 40%. Small-cap Tech is up 50%.
And that’s at the sector index level. These stocks are moving.
AAII Bearish Again
The American Association of Individual Investors (AAII) released its weekly poll results last night.
Once again, we see more bears than bulls. It’s now seven consecutive weeks where that’s the case.
The S&P 500, Dow Jones Industrial Average, Nasdaq-100, NYSE Composite, MSCI All Country World Index, and many more stock market gauges are hitting new all-time highs.
Yet, for seven weeks in a row, individual investors are more bearish over the coming six months than they are bullish.
Each week, the AAII asks a unique question about the market.
This time, they asked individual investors which types of stocks they’re favoring right now.
Only 4% said small-caps:
I think they’re all wrong.
It’s mid-September right now. I’d be really surprised if small-caps aren’t the biggest winners between now and the first quarter of 2026.
That’s the bet we’re making.
We’ve been buying small-caps, and I plan on buying more of them before the week is out.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs
P.S. I’m hosting “Chartapalooza” at 11 am ET today for the first time ever.
I’ll review tickers and charts readers of Everybody’s Wrong have sent for me to break down live and in real time.
I’ll show you exactly what I’m seeing, and I’ll answer your questions too. (Note that I can’t provide personalized investing advice, though.)
There’s no pitching, no selling. Just you, me, and a whole bunch of charts.
Look for a special invitation to join me on Zoom today at 10:45 am ET.