Small-Cap Breadth Signals Further Upside for Stocks
“All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” – Blaise Pascal
This tenet applies to investing. Quiet observation reinforces our bullish 2023 outlook. Small-cap breadth signals further upside for stocks.
Let’s face it, there’s power in silence and observing. Muting out the crowd noise has been difficult the past year. Seductive tales of doom and gloom, recession, and crash-calls have littered the media headlines.
Those predictions failed to transpire. Instead, stocks have zoomed. The oh-so-hated NASDAQ of 2022 is putting on a show for the record books, gaining 37% YTD!
While pundits keep flaming the bearish narrative, our data quietly paints the opposite picture. Media headlines of weak market breadth are simply inaccurate. The rally is widespread, especially with smaller equities.
Today, we’ll enter the quiet room of data and visualize the health of the overall market. You’ll see evidence of strong YTD inflows, revealing clues that we’re in the midst of a small-cap renaissance.
Small-Cap Breadth Signals Further Upside for Stocks
Market trends occur due to one simple force: Supply and demand. When demand rises, stocks fly. That’s been our narrative in 2023.
Our Big Money Index (BMI) plots these flows beautifully. Since April, there’s been a surge in appetite for stocks:
A rising BMI indicates institutions are pressing stocks higher. The latest surge began in June, when we noted monster appetite for smaller cap companies.
Unpopular as it may be, that’s where the juice is still flowing. One look at flows by market cap quietly reveals the trend. Since June 1st, 1512 buy signals occurred in equities sized below $50B.
Put another way, 88% of all inflows have been in small-caps:
Keep in mind, this theme has been in place all year. MAPsignals isn’t some Johnny-come-lately research house. We’ve been profiling these companies week in and week out.
Below, I’ve outlined the Top 20 most bought stocks in our research in 2023. The thin-breadth narrative doesn’t hold water when viewed through the lens of silent data.
Of the 20 most bought stocks, 2 were mega-caps: Microsoft (MSFT) and Broadcom (AVGO). That means 90% of all recurring inflows are in smaller-cap names.
Notice how the average market cap of the 20 names is $157B, but that’s heavily skewed to MSFT and AVGO:
To give you an idea of what recurring buying looks like, here’s the YTD picture of Microsoft. Six discrete appearances on the Top 20 report reveal my favorite market signal – The stairway to heaven:
When you strip out those 2 giants, the average market cap drops to nearly $21B. For giggles, here’s one of the most bought stocks in our research the past year, Super Micro Computer (SMCI). It’s an A.I. juggernaut that few are following.
While NVIDIA (NVDA) gets all the headlines, SMCI has been under extreme accumulation:
Now, SMCI is not a buy right here. The “easy” money has been made. But just know that numerous Technology and Discretionary names have the same data-profile.
You just need a map to see it, or ear muffs to hear it.
The silent message is this: Small-cap breadth signals further upside for stocks.
Let’s wrap up.
Here’s the bottom line: Breadth is strong. Small-cap stocks are having a rebirth after markets reset last year. Media headlines won’t tell you this – only in the quiet room of data does the real image illuminate.
I agree with Pascal. Silence is golden…and profitable with investing.
Keep leaning long. There’s more upside to go.
Enjoy the upcoming holiday, everyone!
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***FINALLY, if you want more insights, today Jason is presenting at 12pm ET for the MoneyShow.
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