How the Market’s “Most Hated” Turns “Most Wanted” VIEW IN BROWSER By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - Why lower interest rates look like a lock
- It’s time to take a closer look at small caps
- The top five small stocks to buy now, according to our Quantum Score
- This small-cap materials stock is in a bullish seasonality window
President Trump says he’s picked the next Fed chief… And it could prove the most consequential decision for markets of his second term – even surpassing tariffs. The Fed chair shapes monetary policy for the U.S.… and by extension, the world. Whoever is in charge has the job of rallying the Fed governors around a shared mission to balance the economy on a tightrope. They do that by holding a mandate of “maximum employment” in one hand and “stable prices” in the other. And they try to keep the two in balance by setting short-term interest rates. They can’t set rates directly across the economy. But shifts in short-term rates have powerful knock-on effects on borrowing costs that consumers and businesses pay. President Trump hasn’t been quiet about his desire for lower interest rates. He says they’ll help lower consumer debt payments, make mortgages more affordable, and make it easier for businesses to borrow money and grow. It also, conveniently, makes it easier for the federal government to pay the interest on its $38 trillion debt. So it stands to reason that whoever he nominates to run the Central Bank after current Fed chair Jerome Powell’s term ends next May will share his vision and slash rates. That means it’s time to take another look at small-cap stocks… Small-cap stocks have market values of between $250 million and $3 billion. And because they’re still in the early stages of growth, they tend to rely more on short-term borrowing to fund day-to-day operations and future growth than their large-cap cousins. They don’t have the cash hoards, bond-market access, or global revenue streams that giants like Nvidia or Google enjoy. So when interest rates fall, a small cap’s cost of capital drops immediately. And even a modest one can dramatically widen profit margins, since these companies’ earnings are smaller and more variable. This unlocks expansion plans that were previously too expensive. It’ll be quite a turnaround from the last four years, when the Federal Reserve had hiked interest rates to the highest levels since 2000. It’s why small-cap stocks have gone nowhere, as you can see below with the small-cap S&P 600 index (SML) below. That’s in stark contrast to the large-cap S&P 500 index (SPX), which has soared. Take a look… 
In a roaring bull market, investors have left small-cap stocks for dead because they know high interest rates are holding those businesses back. But if Trump’s new Fed chief does what his boss tells him to and cuts them, that may be about to change in a big way. Green means “go” for small caps… Take a look at this next chart. It shows TradeSmith’s Market Health indicator, the S&P 600. The S&P 600 has been in the Green Zone since June, when it traded at about 1,300. As of Monday, it was trading near its highs for the year at about 1,470. That’s a gain of more than 14%: 
Think of Market Health like a stoplight. Green means Go – or buy, in this case. Yellow means Caution. And Red means Stop – or stop out. When a stock or index we track is in the Green Zone, it means it’s in an uptrend relative to its historical volatility. And our Market Health indicator would have gotten you into the small-cap trade three months before the Fed’s first interest rate cut this year, which happened in September. It would have also kept you in small caps as the Fed cut rates again in October… and through the recent patch of volatility. With the long-term average annual return of the S&P 500 running about 10%, you could’ve seen gains much higher than that in far less than a year. Using our tools, you’d also have known how much risk to take on individual small caps… That’s thanks to our Volatility Quotient (VQ%). It’s our measure of average historical volatility that we apply to every stock, index, and ETF we track. The S&P 600 has a VQ% of 15.6%. So, if we see a 15.6% drop in the S&P 600, it would flip to the Red Zone and be considered a sell. We monitor the long-term health of all the major indexes, as it’s one of the biggest signs of the market turning. If you’ve been following us for a long time, you’ll know our CEO, Keith Kaplan, sold most of his stocks on Feb. 27, 2020 – just days before the COVID pandemic hit in full force – after he saw the major indexes shift into the Red Zone. Then, using the same indicator, it showed him to get back into stocks on March 27, 2020… before the large-cap S&P 500 index went on to soar 45% that year. Now, we have the Green signal in small caps – indicating it’s time to buy. But if you want to make real money in small caps, do this… Trading individual small-cap stocks is not for the faint of heart. These stocks tend to have higher opportunity for growth… at the cost of higher volatility. It can be perilous if you go about it without a system backing you up. That’s why I never buy a small-cap stock without first running it through my colleague Jason Bodner’s Quantum Score. Before joining the TradeSmith team, Jason was the Head of Equity Derivatives for storied financial services firm Cantor Fitzgerald. His job there was executing multimillion-dollar trades – even billion-dollar trades – for some of Wall Street’s wealthiest investors. When you’re buying that much stock, you tend to leave telltale signs. This can alert other investors of your intentions. And if you’re not careful, they’ll pile in and push prices up before you fill your entire order. That’s why, when you were an institutional investor in those days, you called Jason. He was an expert in covering up your tracks while you bought in. Now, he uses those same skills to spot when institutional investors are taking unusually large stakes in stocks. Then he alerts his subscribers to these money flows so they can profit. That’s where his Quantum Score comes in. It first ranks thousands of stocks by their fundamentals – revenues, profits, margins, etc. Then it ranks the best stocks’ technicals. A high technical score means a stock is the target of heavy institutional buying. The combined Quantum Score points you to the best stocks with the highest institutional interest. I ran a screen on stocks in the S&P 600 that rate more than a 90 on Jason’s system and are in their Green Zone. That narrows the 600 stocks in that index down to just 23. The top five are Krystal Biotech (KRYS), CareTrust REIT (CTRE), Warrior Met Coal (HCC), DigitalOcean Holdings (DOCN), and Progyny (PGNY). 
Let’s take a closer look at Warrior Met Coal (HCC)… HCC stood out to me because it’s in the Materials sector. And in yesterday’s Daily, we established that it’s typically the best sector to own in the month of December. And surprise, surprise, this stock just entered a strong seasonality window lasting until Dec. 25: 
HCC only has eight years of trading data to work with. But it’s been up for all but one of those years from Nov. 20 through Dec. 25 for an average return of nearly 14%. (The market’s not open on Christmas, of course, but you get a half-day of trading on Dec. 24 and a full day on Dec. 26 to close out any trades.) The stock also recently posted a new all-time high for the first time since 2024. The combination of strong seasonality for materials stocks and Jason’s Quantum Score make this a great trade to watch. Before we go, it’s time to celebrate… 2025 is TradeSmith’s 20-year anniversary. And we’re incredibly proud of the work we’ve done over the last two decades. Building from the bedrock of our flagship risk management software, TradeStops, TradeSmith has grown to a 128,000-member strong outfit with analytical firepower to match our reach. In just the last few years since Keith Kaplan took the helm at TradeSmith, we’ve launched our factor-based investment strategy suite, Ideas by TradeSmith… Our breakthrough seasonality software with Trade Cycles… The industry-defining AI forecasting model Predictive Alpha… And all along the way, set a new standard for what sophisticated investors should expert from financial research firms. So to celebrate, we’re doing something that first sounded a little bit crazy to me… Starting today, Keith is opening the doors to our most valued membership, TradeSmith Platinum, with an unprecedented offer. We’re letting in new Platinum members with the opportunity to secure lifetime access to everything we’ve published in Keith’s tenure… for less than the annual price of everything TradeSmith had to offer BEFORE Keith transformed the company. Keith will also pull back the curtain on what’s coming next for TradeSmith – including major platform upgrades, new tools, and new research firepower. And he’ll introduce new, world-class additions to our analyst bench (with special guest appearances you’ll surely recognize). If you’ve ever wanted a single place to get the tools, guidance, and research that can help you find opportunities, manage risk, and stay on the right side of major market turns, this is your moment. Go right here for everything a Platinum membership gets you today… plus what it will get you in 2026 and for every year you stick with us. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily | 
Post a Comment
Post a Comment