Should you really try to pick the best stocks to buy? Or is it ok to just invest in “the market” and see how it goes?
Today, I want to show you an exciting chart that just surged to a new all-time high. This is the perfect breakout for stock pickers. And it gives us the green light to pick our favorite stocks instead of simply buying a blue-chip index fund.
Take a look!
The chart you see above tracks the Russell 2000 index — a basket of 2,000 small-cap stocks trading on U.S. exchanges.
For the majority of 2021, small cap stocks have been trading sideways. This, while large-cap stocks pushed the S&P 500 and Nasdaq indices higher throughout the year.
Unfortunately, mega-cap tech stocks drove most of the returns for popular indices like the S&P 500. And if you avoided these particular stocks, you may have been left behind.
A few weeks ago, we talked about avoiding “the market” because most big indexes rely too heavily on a handful of stocks. This month’s breakout for small-cap stocks confirms that idea and gives us a new set of opportunities to focus on!
Why This Stock Pickers Breakout Matters
The Russell 2,000 index is an equally weighted index of about 2,000 small-cap stocks. The index gives investors a picture of how a broad assortment of stocks are trading. Managers rebalanced this index each year to make sure a handful of individual stocks don’t wind up having an oversized affect on the group.
This is very different from the way the S&P 500 and Nasdaq 100 indices are compiled. Both of these indices give more weight to bigger companies. So giant blue-chip stocks like Apple, Amazon and Microsoft are much more important than other stocks.
The Dow Jones Industrial Average is a price-weighted index which makes even less sense. Why would a stock trading at $1,000 per share matter more than a stock worth $50? Especially if the companies are the same size in terms of revenue, profits or market cap? Don’t get me started!
Since the Russell 2,000 index is equally weighted, the breakout is particularly exciting for us a stock pickers!
The breakout shows that many stock prices are surging higher. Which indicates broad strength in the overall market.
I love seeing the Russell 2,000 index push higher. As an investor it means I have many more opportunities to choose from. And the breakout also shows broad strength for the overall economy!
Where to Profit From This Breakout
The Russell 2,000 covers a broad group of sectors and industries. But there are a few important areas that have made a big difference for this index.
Financials in particular have helped drive the breakout for small-cap stocks.
There are a number of regional and community bank stocks in the Russell 2,000. As interest rates start to rise, these banks will be able to generate bigger profits from loans made to individuals and businesses. And thanks to the global economic recovery, small businesses will rely heavily on these banks for capital!
Industrials have also been a strong area.
This industry is dominated by large firms like Caterpillar (CAT) and Honewell (HON). But there are also many great opportunities to invest in smaller industrial stocks with plenty of room to grow.
Take a look at this table of small-cap industrial stocks included in the Invesco S&P SmallCap Industrial ETF (PSCI). You can find a more comprehensive list here.
Energy stocks have also been a key source of strength for the Russell 2,000 small cap index. This sector only makes up a tiny sliver of the large-cap S&P 500. So as energy stocks surge higher this year, they’ve helped the performance of the Russell 2,000 small cap index. And they haven’t made much of a difference for more well-known large-cap indices.
Bottom line, the Russell 2,000 breakout is a great sign for stock pickers. Mega-cap tech stocks are no longer the only game in town. And skilled stock pickers can now grow their wealth by selecting companies with the best profit opportunities!
