Small cap

Stocks, is the Small Cap rally about to begin?

Small capitalization stocks, especially US ones, belonging to the technology sector, remain firmly under the magnifying glass of many experts and analysts, mainly due to their speculative nature but, at the same time, potentially rich in high added value for a long-term portfolio.
Interest in this type of activity seems to have recently resurfaced following the reaching of important minimum zones recorded by some graphic indicators.
Meanwhile, global economic and financial dynamics seem to have reached an important turning point, and according to many, the time may have come to start monitoring this particular stock market sector more carefully.
Could the comeback moment for Small Cap stocks finally be back? Eyes on Small Cap stocks What might make sense to focus on is precisely the fact that these stocks, unlike the so-called Blue Chips, big caps, large capitalization stocks, have remained quite behind in terms of prices.
It is no coincidence that the extension recorded by the Nasdaq and the S&P 500 in 2023 was mainly influenced by the performance of the latter stocks, while the former significantly underperformed.
This can be understood just by looking at the performance of the Russell 2000 index, also called Small Cap 2000, which recorded an overall negative trend if considered in YTD, of -1.66%, compared to a growth of 30.32% of the Nasdaq and the 14.04% of the S&P 500.
The highlighting of a possible minimum point for this type of company could be anticipated precisely by the combined ratio between two ETFs representing the Small Cap and Big Cap sectors respectively: the Vanguard Small Cap ETF (VB ) and the Vanguard Mega Cap ETF (MGC).
From the graph obtained from the VB/MGC ratio it is easy to realize the enormous gap that exists between these two stock market sectors.
The ratio reached post-covid 2020 lows, a historically never reached area.
Clearly, traders and investors, faced with the economic dangers of the last two years, and faced with the sudden increase in corporate financing costs, have chosen to entrust their capital to large capitalization companies on which the impact of The increase in interest rates could be managed in a less critical manner, evidence which is also confirmed by the budget results of recent periods.
According to many, therefore, we may have reached a minimum zone for this stock market sector, in which it could begin to appear convenient to reward companies with high growth prospects.
Even more so, in the face of recent statements from the Federal Reserve, which has kept the level of interest rates unchanged, appearing to be data-dependent, fueling the idea among operators that Fed rates may have reached a maximum point .
Friday's latest jobs report paints a different economic picture than the previous one, characterized by, albeit small, economic tilts.
However, analysts' gaze remains critical and focused on the concept of "higher rates for longer": how much longer will certain companies be able to compete with such high rates? The default prospects for 2024-2025 are higher than in 2023.
At the same time, also from a geopolitical point of view, there are some strong concerns.
Firstly, the recent conflict in the Middle East, which led many operators to move again to assets considered safe havens, such as gold, further undermining the growth prospects of the speculative sectors, even if recently the market seems to have returned to «risk on» mode.
Secondly, the conflict in Ukraine, which, although less covered by the media lately, continues to persist and does not seem to have reached a conclusion at all.
The latter, even more so, actually represents a strong unknown, albeit often underestimated, as it is directly connected with the markets of developed countries.
For this reason, it might seem interesting to think from a perspective of total diversification, perhaps through ETFs.
Among the most discussed is the Invesco NASDAQ Future Gen 200 ETF (QQQS), an ETF which suffered a sharp decline during the year, due precisely to these concerns.
Among the main fund holdings that make up this ETF are Intercept Pharmaceuticals Inc, WaVe Life Sciences Ltd, Mersana Therapeutics Inc and Anika Therapeutics Inc.
Why expect a rally on Small Cap companies? In fact, the share prices of Small Cap companies have recently reached rather significant lows, as evidenced by the performance of numerous ETFs that follow the behavior of this sector, as well as by the performance of the Russell 2000 index.
In parallel, it should be noted that the fate of this market segment is closely linked to financial dynamics, which could, over time, find greater stability, and to the economic conditions of the country of reference, which seem to be just beginning to emerge.
It is important to underline that the financial market often moves based on convenience considerations and investor expectations.
Therefore, this could be an appropriate time to start carefully monitoring the performance of this specific sector, in light of the current prospects and uncertainties.

Author: Hermes A.I.

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