U.S. stocks tumbled earlier this month…
Unfortunately, one corner of the market was already falling before it happened. And the recent fall pushed that decline into overdrive.
Small-cap stocks peaked in late August. They’re down double digits since then, with much of the fall happening in the last two weeks.
History says we could actually see double-digit gains over the next year.
Let me explain…
Normally, it’s a bad idea to fight the trend. But sometimes an investment falls too far, too fast. It becomes oversold, which makes a snapback likely.
When I say “oversold,” I’m referring to the relative strength index (“RSI”). This simple measure compares an investment’s recent gains against its recent losses.
The RSI is a great contrarian tool. It tells us if the recent move in an asset can continue, or if it’s overdone. If something falls too far, too fast, it will fall to oversold levels. That happens when the RSI falls below 30. And it means a rally is likely.
U.S. small caps have only triggered an oversold extreme 1% of the time going back to 1990. But it just happened again a couple of weeks ago. Take a look…
Small-cap stocks have been falling for a few weeks. They’re down double digits. It doesn’t look pretty…
Still, history says we don’t need to panic.
Going back to 1990, we’ve seen that after U.S. small caps fell below and jumped back above oversold levels, they’ve tended to outperform over the next year. Take a look…
U.S. small caps have been a solid winner for nearly three decades… returning 9% a year on average. But buying after they hit oversold levels could have crushed that return.
Specifically, similar instances have led to 4% gains in three months, 7% gains in six months, and a solid 14% return over the next year. That’s a big outperformance versus a boring buy-and-hold strategy.
U.S. small caps moved out of oversold territory last week. So history says a year of solid gains is likely, starting now.
One simple way to make the investment is the iShares Russell 2000 Fund (IWM). This fund tracks the Russell 2000 Index – the benchmark for the U.S. small caps.
It’s normally smart to wait for the uptrend before investing. But small caps are coming out of massively oversold levels right now. That means the snapback in prices could be just around the corner.
History says that could lead to 14% gains over the next year. If you’re interested, IWM is a simple way to make the trade.
Source: Daily Wealth