Small-cap stocks are on a tear. After crashing into bear market territory early this year, small company shares are up almost 40% from their lows. Since the election, small stocks have been smoking hot. Trump’s surprise victory lit a match under small company shares. The Russell 2000 index is up 11.6% from its November 8 closing level—that was only 11 trading days ago.
According to Bloomberg’s exchange traded fund (ETFs) flow data, the four largest small-cap ETFs have gathered over $7 billion in assets since the election.
As our chart shows, the magnitude of the inflows dwarfs anything seen in the last seven years.
The stampede into small-company shares has pushed the Russell 2000 index to a more than eight percentage point lead over the S&P 500 so far in November. Since 1979, there have only been four months when the Russell 2000 outperformed the S&P 500 by more than eight percentage points.
Small stocks are in rarefied air to be sure. With the proliferation of ETFs, electronic investing, and factor-investing fever, there is no doubt a rising tide is lifting some undeserving small company boats.
For sophisticated investors, now would be the time to start screening for shorts in the small-cap space.
At Young Research, we are developing a new long-short program for our subscribers and research clients to profit when the market presents opportunities like these.
If you are a self-directed investor, you can keep up on our progress by subscribing to Intelligence Report. For those interested in a do-it-for-me approach to long-short investing, I would suggest you sign up for Richard C. Young & Co. Ltd.’s client letter (free even for non-clients) to get alerted to a launch date for the new strategy.
Jeremy Jones, CFA
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