Last week, investors got hosed…
The Fed warned that interest rates would remain “higher for longer.”
That was enough to send stocks sliding.
The tech-heavy Nasdaq and the blue-chip S&P 500 had their worst week of losses since March.
That sounds bad.
And if you’re tuned into the mainstream media, you may be worried. You may even be thinking of lightening up on stocks.
Don’t…
As I’ll show you today, now is one of the best times in 20 years to buy my favorite kind of stock – small caps.
These are stocks in companies in the early stages of growth that still have valuations of less than $2 billion.
That makes them less than 0.2% the size of Microsoft, Apple, Nvidia, and other mega-cap stocks.
It also makes small-cap stocks highly sensitive to large influxes of investor money.
Said a different way, when large amounts of money flood in, they shoot higher.
How do I know it’s a great time to be buying smaller stocks? Why am I telling you this is such an exciting time to be an investor when most mainstream media folks think the opposite?
It’s down to one simple chart… and 20 years of market history.
It may sound strange given all the doom and gloom in the press.
But over the past 20 years, there have been only a handful of opportunities as exciting as the one in front of us today.
You can see what I mean in the chart below.
It shows the long-term trading range of the iShares Russell 2000 ETF (IWM).
It’s a popular exchange-traded fund (ETF) that tracks the 2,000 smallest stocks in the U.S.
As you can see, IWM has traded in a pretty steady range going back to 2002.
The purple line marks the lower end of the range. IWM has dropped significantly below this line only two times over the past two decades.
And each time this happened was during times of extreme market fear.
One of those times was the 2008-2009 financial crisis.
Another in March and April 2020. That’s when folks had a knee-jerk reaction to the COVID-19 pandemic and dumped stocks en masse.
As you can see, each of these times marked a low for small caps. And after these lows, small caps zoomed higher.
And this chart doesn’t just show us good times to buy these stocks. It also pinpoints great times to sell them.
The green line on the chart marks the upper part of IWM’s 20-year trading range.
Every time IWM began to bump into this line, it signaled a coming downdraft for small caps.
Right before the 2008 crisis, for example, when everybody was buying homes with no income, no job, and no assets.
And in 2020, 2021, and early 2022. That’s when we got a mania in everything from meme stocks, to crypto, to NFTs. Everybody and their brother opened up a Robinhood account.
I remember my mom would call and text me about stocks, which is alarming. She knows next to nothing about the stock market. When she calls asking about stocks, you can be pretty sure we’re in a time of extreme greed. It’s the ultimate contrarian sell signal.
Here’s the thing that most investors don’t get. But it’s something I want to sear into your mind…
You don’t want to be too excited about the stock market when everybody else is.
Those are times when prices and valuations are high. As a result, your potential returns are lower.
There’s even a risk in times like this that the stock market will plunge.
This is what happened in 2022 after the euphoric market highs of the pandemic years.
Lucky for you, we’re not in one of those bad times to buy today. Quite the contrary. We’re in one of the times when small-cap stocks have the best prospects.
IWM is at the lower end of the range. That means it’s time to buy.
The folks on CNBC will talk about how dire things are… how much worse it could get… and how we should roll ourselves up in a cocoon and not invest in the stock market…
That will scare even more investors out of these stocks.
But we’ll know better. We’ll know that where we are in the 20-year trading cycle means it’s typically a great time to buy.
And the best place to look for opportunities in the small-cap market right now is in stocks that will benefit from the AI boom.
Take one of my recent recommendations at my small-cap tech investing advisory Exponential Tech Investor.
It’s a small-cap semiconductor testing company. It’s testing critical components that go into Nvidia’s cutting-edge AI chips.
Without this company, Nvidia would not be the market leader in AI.
Two weeks ago, it got a major order for its testing equipment. Shares rallied 17% above my recommendation price on the news.
It’s one example of what I call the “Nvidia Effect.”
Nvidia is a crucial company for the build-out of the physical infrastructure needed to power ChatGPT and other AI systems.
But Nvidia is a $1 trillion company after its share price has tripled this year. And its giant size means it’s not going to deliver the 1,000%-plus gains that I’m looking for.
But it’s still going to be making chips for the AI hardware build-out. And small, early-stage companies that make the components that go into its chips… or are key parts of the manufacturing process… are going to soar.
If you’re not subscribed to my Exponential Tech Investor advisory, you can still profit from the rally in small-cap stocks by buying the iShares Russell 2000 ETF (IWM).
It holds a basket of stocks, so your upside won’t be as large. But it should still deliver double-digit gains in the months ahead.
Regards,
Colin Tedards
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
