A Breakout in Optimism By Michael Salvatore, Editor, TradeSmith Daily In This Digest: Consumer and business optimism is the next big breakout… Small caps keep feeling the love… How to whittle down the stock market to 31 small- and mid-cap buys… Pre-election money flows give some clues about 2025… November 6 was a day rich with breakouts… We talked about profitable small caps and bitcoin on Friday. Both rallied as a direct reaction to the Donald Trump win. But another breakout caught my eye last week – consumer optimism. The University of Michigan’s Index of Consumer Expectations rose to a three-year high, with an index value of 78.5. That’s up nearly 6% from last month and over 38% from last year:
These are pre-election numbers, to be clear. But you have to understand the economy was consistently cited as the top political issue of this election year. Trump’s election odds rose through 2024 right along with consumer expectations, and especially in the last few months. That makes it very difficult not to correlate the two. Another key chart from the University of Michigan comes to us in the expectations of long-term business conditions. Expectations for positive business conditions are now at their highest point of the 2020s, a massive recovery from the depths of 2022 when inflation raged:
These surveys are important to understand and follow. It’s a finger on the pulse of not just consumers, some of which are bound to be business owners in their own right. Right now, they’re shouting that they’re excited to spend and build… and that behavior will be key to another big trend happening right now. Two charts show small-cap dominance is here to stay… We’ve been telling you all year long that small caps were primed to outperform. Falling rates, a likely Trump presidency, and the simple fact that they’ve lagged the market for the entire bull run all pointed to a massive rotation out of the big boys and into the upstarts. Last week’s immediate election reaction showed us that investors are hungry for small caps, as the S&P SmallCap 600 was the first major small-cap index to break to new highs. But there’s been even more supporting evidence since then… If you need any definitive proof of how big the small-cap trade will prove to be, look no further than this chart – the daily fund flows for the Russell 2000 ETF (IWM). On Thursday, November 7, IWM saw flows of $3.94 billion. That nearly doubles the next highest daily inflow of the year back in July:
Source: FactSet An even bigger deal: It’s the highest daily inflow of the past decade. That’s a ton of money flowing in. So it’s little surprise that small caps are now outperforming large caps over the last year:
The above chart shows how the SPDR S&P 500 ETF (SPY), the iShares Russell 2000 ETF (IWM), and the more value-oriented S&P SmallCap 600 (SP600) stack up since November 8, 2023. IWM is now slightly ahead for that time period, while the S&P 600 has lagged. But take a close look at the left side of the chart. The holiday period saw a huge small-cap surge in 2023. That tracks with seasonality. Over the last six election cycles, IWM has risen an average of 5.93% from today through the end of December, with a 100% hit rate:
This, the consumer sentiment and business conditions surveys, and the election are all intimately tied together. Optimism about the future is accelerating. And with optimism comes an appetite for risk. That means money will continue to rush into stocks in general… but especially stocks with high growth potential, like small caps. Money is rushing into this sector, and quickly. You need to be on the right side of it. Let us help you. TradeSmith’s software is the best in the world at screening for new opportunities… Our powerful Screener software lets you quickly compile a list of the must-own stocks for the new era. I just set up the following screen in my TradeSmith Finance platform. If you’re a subscriber, feel free to follow my lead and tweak to your liking:
This screener will surface all the stocks in our system that have these key qualities: Are in the Green Zone, our algorithmic measure of positive price action as determined by each stock’s individual volatility In a broader, longer-term uptrend Have flashed an Entry signal within the last two months Have positive earnings (a price-to-earnings ratio greater than zero) Are small caps or mid-caps, giving us a market cap limit of $10 billion Have a Quantum Score right in Jason Bodner’s “sweet spot” of between 60 and 85 This will show us a bunch of great small-cap stocks that have recently broken out, have positive earnings, and are seeing evidence of institutional money flows. These factors together are extremely powerful and should give us a great battle plan as we enter the most seasonally bullish period of the year. This also whittles down the entire stock market universe to just 31 names. Subscribers can access all of them, but I’m happy to share the top 10 here today:
This list is, importantly, sorted by how recently these stocks flashed a new entry signal and entered the Green Zone. The most recent breakouts into the Green Zone are up top and work their way on down. This is, of course, just a starting point for your research. But it should show you what’s possible when you utilize TradeSmith’s software to help you invest. All of these names have the qualities that we look for to find the multi-bagger winners of the future. Growing earnings, healthy fundamental quality, solid uptrends, and recent breakouts. Take note of these qualities and prioritize them in your own analysis. Finally, let’s check in on the final pre-election Quantum Edge Hotlist… My favorite Monday tradition is looking through Jason Bodner’s Quantum Edge Hotlist. It uses Jason’s purpose-built system to find the stocks with the best growth picture and unusually strong institutional-level buy volumes. Here’s the final Quantum Edge Hotlist before the election results:
We continued to see tech and communications companies dominate the list, with Apollo Global once again earning the top spot next to Arista Networks. Some new entrants like AvePoint and Paycom show that software continues to be a good trade. And two biopharma companies, Catalyst Pharmaceuticals and Exelixis, also joined the top rankings. Not all biopharmas are created equal, however. Neumora Therapeutics and Rocket Pharmaceuticals joined Moderna at the bottom of the list, with not-list staples Icahn Enterprises and Fortrea Holdings sticking around as well. I can’t wait to see what the first post-election hotlist looks like… and something tells me it’ll be a real shake-up with small caps now in the sights of the Big Money. To make sure you get access to the list, as well as Jason’s model portfolio and Quantum Scores on your stocks, go here and learn more about a Quantum Edge Pro membership. To your health and wealth, Michael Salvatore
Editor, TradeSmith Daily | 