Small-Caps Poised to Lead

Sector rotation is the lifeblood of any bull market.

As we head into Q4, I’m thinking about where the next wave of outperformance comes from.

Small-caps have been left for dead. Nobody wants to touch them, and sentiment couldn’t be more one-sided.

When positioning gets this extreme, the unwind can catch people off guard.

Here’s a look at the Small-Cap Russell 2000 vs. the Large-Cap Russell 1000, bouncing off a critical support level.

Every major bull run this century has seen small-caps step up and lead at some point — even if just for a short period.

That’s not a coincidence. It’s a sign of market health and broad participation.

If small-caps are going to start outperforming, this is the most logical place for it to happen.

Whether it turns into a major shift or just a powerful short-term move, small-caps still have a role to play before this bull cycle is done.

If there’s real buying taking place, the relative strength will show it. There’s only so much capital to go around in these smaller-cap stocks.

One thing we’ve done is update the rules.

Traditionally, small-caps were defined as stocks between $300M and $2B in market cap.

But that feels outdated. For us, small-caps now range from $1B to $4B — and honestly, I think we could even push the upper threshold to $10B.

Here’s our latest Minor Leaguers Report:

Since we sort the list by proximity to 52-week highs, the names at the top are potential future leaders.

They’re not just showing strong relative strength — they’re also making new highs on an absolute basis.

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Stay sharp,

Alfonso De Pablos

Director of Research, All Star Charts