Small caps: The bet that has waited 1,214 days

Small caps: The bet that has waited 1,214 days for its turn

Have the small caps finally arrived at the US stock market party? There is a specific technical argument: the spread between SPY, the ETF tracking the S&P 500, and IWM, the Russell 2000 ETF, has reached a level identical to March 2020. That was just before small caps started a rally that ended in a historic short squeeze, with GameStop, AMC, Spotify, or Pinterest among the most cited cases. With the debt ceiling resolved and October lows confirmed, the thesis argues that capital will rotate from tech stocks to S&P and Russell values.

With abundant liquidity and a festive mood, the narrative barely acknowledges that the Federal Reserve may still need to make adjustments: the economy continues to create jobs, and that, it is argued, is what matters. The window identified to take advantage of this runs from May until the trinc summer, and those who warn are not traitors.

The SPY/IWM spread and levels watched by bulls

The chart supporting the bet is the spread between the S&P and the Russell, which would have reached the same point as in March 2020. From there, small caps started a ramp that culminated in a vertical rise for the most punished stocks.

In IWM, the 189 level is considered vital, with 195 as the second reference. The sideways zone since December is interpreted as a control area where lows are sustained with volume, while the last drop would have occurred without significant trading. The target managed in case of a breakout is the gap left between 223 and 225. On paper, the index jumps at any moment.

Where there is money, there is a story. The author already accumulates a basket of beaten-down names: 500 shares of FCEL, plus STNE, UPST, TLRY, or RIOT, with the idea of selling those that explode first and rotating into laggards. Spotify and Palantir remain on the radar for when they correct.

VCP, stages, and other ways to pick the rising stock

The method is not unique. Some buy what is at highs and breaks bases strongly, relying on market breadth, which is starting to give green signals. Others warn of the opposite risk: catching a falling knife usually ends in injury.

Among the cited systems are VCP and Mark Minervini's phase analysis, and Stan Weinstein's stages. Reading with these criteria suggests several stocks have already entered stage 2 while the Russell remains in stage 1, building a base. Another name put on the table, with green volume bars and a narrow base, is TNYA, about which the author admits not even knowing what it does.

The main problem with small caps is that only those who pick the right specific stock win. Buying the index solves selection but gives up on the big jackpot.

The risk optimism hides: debt and high rates

Against the enthusiasm, a recurring warning: the debt ball of many small companies is huge, and if rates stay around 5% for years, more than one balance sheet will end up devastated. With free money, accounts balanced themselves; now you have to pay. The repeated advice is to stick with sector giants, with cash and no debt.

The other objection is fundamental: that the Russell is a gigantic set of speculative companies. Selling and waiting outside doesn't necessarily miccionan an error, because in investing there is no obligation to swing. An index has thousands of balls to hit; you don't need to try the first one that comes by.

What has already been gained while waiting

Some accounts show results during the wait. One participant declares +17% in one month of exposure to the Russell, +23% in five days with STEM, +35% in five days with Priority Holdings, and +36% in five days with Aurora Innovation, plus positions between +150% and +200% year-to-date. Another allocates 18% of their portfolio to profitable small caps in good markets.

Not everything is joy. Those who bought something high before the last correction admit they didn't expect it and that only the balance of other cheaper positions keeps the whole standing. An analysis by Greg Tuorto, of Goldman Sachs Asset Management, defended a significant rebound for small caps after a year of very poor performance; the reception was skeptical, arguing that large firms often issue bullish forecasts at peak zones.

How far it can go according to the bull thesis

The most ambitious scenario places the IWM impulse started in November 2023 extending until late 2026, with a target range of 320 to 360. There is talk of a 17-year bull cycle peine in 2017, of a parallelism between the bitcoin chart and the Russell, and of bets on January 2027 and fiscal years 2027 and 2028 on the S&P. Also of Paypal going vertical, after someone ruled it worthless.

In between, there was a correction, with the leveraged ETF on the Russell falling to the 47 zone and a subsequent re-entry for the medium term. The dominant reading remains the same: pullbacks exist to shake out the last buyers, and the horizon of this writer is a couple of years, not a single session. Powell and inflation data are, in that framework, noise.

With such an accumulation of timelines —2026, 2027, 2028— the only thing that hasn't failed so far is the calendar.