Portfolio Review: Time to Pay Attention to Small Caps Again
Markets often whisper before they shout. Leadership changes don’t announce themselves in the headlines — they show up first in relative strength. Right now, the whisper is turning into something louder: small caps are taking the lead.
For years, investors have ignored small caps and microcaps. The story has been mega-cap tech, the S&P 500 heavyweights, and a handful of household names driving indexes higher. But beneath the surface, something important has shifted.
The Microcap Breakout
Take a look at the Microcap ETF ($IWC). After years of chop and frustration, microcaps are powering higher — up more than 50% from the liberation day lows. That kind of move isn’t noise. It’s the kind of thrust that signals something deeper is changing.
The chart shows price pushing right back into the 2021–2022 resistance zone.
When markets rally this hard off deep lows, it often means the supply/demand balance has shifted. Sellers who dominated for years are finally exhausted, and buyers are back in control.
Microcaps don’t just drift higher on their own. They represent the most speculative end of the equity market. When microcaps lead, it usually means risk appetite is expanding — and with it, the potential for broader leadership shifts.
Small Caps vs. the S&P 500
The second chart makes the case even stronger. On a three-month basis, small caps (Russell 2000, $RTY) are outperforming every single S&P 500 sector. Industrials, financials, tech, consumer discretionary — all lagging.
That’s not just trivia. Three-month relative strength is one of the best forward indicators we have. When a group takes leadership over that time frame, the odds are high it keeps leading. Markets are rotational, and right now the rotation is into small caps.
Relative strength like this is incredibly significant because it tells us where capital is flowing next. Not where it has been, but where investors see opportunity. And the fact that small caps are beating every major sector suggests this isn’t just a bounce — it’s a potential change in regime.
Why This Matters
Small caps are the heartbeat of the domestic economy. They’re more sensitive to credit, interest rates, and liquidity than mega-caps. When they outperform, it usually means something important is shifting under the surface.
Pair that with what we’re seeing in microcaps: a 50% move off the lows. That combination — small caps leading relative strength and microcaps breaking higher — is not a coincidence. It’s a signal.
When leadership broadens beyond the top ten names in the S&P 500, it’s healthier for the market. It means risk-taking is returning, liquidity is spreading out, and opportunities are expanding. It’s also where the biggest surprises usually come from.
Looking Forward
The question is whether investors are willing to pay attention. For years, small caps have been dismissed as dead money. But markets don’t stay dead forever. They bottom, they base, and then — usually when consensus has written them off — they rip higher.
We may be at one of those moments. The data is clear:
Microcaps have already rallied 50% off the lows.
Small caps are leading all major sectors over the past three months.
Relative strength is pointing to continued leadership.
If this is the start of a new cycle, then ignoring small caps now could mean missing one of the most important shifts in equity markets in years.
The Message
Leadership changes are never obvious in real time. They happen quietly, in relative charts, in the forgotten corners of the market. Right now, that quiet leadership is showing up in small caps and microcaps.
The opportunity is here. The market is telling us: stop ignoring the small end of the spectrum. Because when microcaps lead, it’s often the beginning of something bigger.
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