Small-Cap Stocks Could See a Double-Digit Rally Over the Next Year

It’s up 23% this year as of Friday’s close. And this will be the third straight year of 16%-plus gains.

Certain parts of the market have struggled compared to the S&P 500, though. Small-cap stocks are one of the best examples…

The Russell 2000 Index is up just 10% over that time frame. And it’s well below its high for the year. Small caps could be at the start of a turnaround, though…

The Russell 2000 recently fell 12% in less than a month. That was a sharp drop in a short window.

If you’re wondering if this downturn will continue, history shows it’s not likely. The quick fall led small caps into oversold territory. This doesn’t happen often. But when it does, it’s worth paying attention to…

Similar setups have led to winning trades 82% of the time over the next year. And that means small caps are set up for a fantastic 2022. Let me explain…

When I talk about oversold setups, I’m referring to the relative strength index (“RSI”). It’s a contrarian tool that lets investors see when a stock or market has gotten ahead of itself… suggesting a reversal is likely.

When a market falls below an RSI of 30, that means it’s in oversold territory. And when it rises above 70, that means it’s overbought.

Small caps just hit oversold territory at the end of November. The Russell 2000 fell well below an RSI of 30. Take a look…

We haven’t seen this type of sharp drop in small caps since March 2020. Back then, the Russell 2000’s RSI fell all the way below 25. And it just happened again last month.

Since 1990, when the Russell 2000 has fallen below and rallied back above an RSI of 25, small caps have tended to soar. This strategy has led to big outperformance compared to a buy-and-hold strategy. Check it out…

An 8% gain in a typical year isn’t bad… especially over a 30-year period. But history shows buying after setups like today’s can lead to even better results…

Similar cases have led to roughly 3% gains in three months, 11% gains in six months, and a 21% gain over the next year. That’s more than double the typical buy-and-hold return.

In short, the recent downswing in small caps is overblown. Instead of a further decline, we should expect to see a double-digit rally over the next year.

The simplest way to take advantage of this opportunity is the iShares Russell 2000 Fund (IWM). It tracks the benchmark Russell 2000 small-cap index. And it’s the easiest way to profit from a small-cap boom in 2022.

Given today’s setup, that makes it a fund to consider as we head into the new year.

Good investing,

— Chris Igou

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Source: Daily Wealth