Small-cap stocks are typically among the biggest winners in the stock market even though they have the smallest capitalization (the amount of stock traded).
Small caps might be just 0.1% as large as Apple or other tech giants.
This small size makes it easy to understand why these stocks should be attractive to individual investors.
The opportunity for growth is substantially greater. It’s much easier for a stock worth $2 billion to double than it is for a $2 trillion stock.
Small caps are always attractive on a relative basis. But there’s another reason you should consider buying small-cap stocks now.
Seasonality Reveals the Best Time to Buy Small Caps
Seasonals are tendencies for prices to behave in particular ways at certain times.
For example, corn prices tend to decline in the fall. That’s when farmers bring crops from the fields to markets.
Supplies increase at storage facilities, and therefore corn suffers a seasonal price decline almost every year.
Similar tendencies appear in the stock market. Right now, one of the strongest seasonal trends is about to unfold.
You see, the fourth quarter is the most reliable time for small-cap stocks.
They delivered gains 84% of the time since 1995. You can see how that compares to the other three quarters in the chart below:
Now, some investors may question the accuracy of this data.
That’s because it’s commonly believed that small caps do best early in the year and suffer losses in the fourth quarter.
That belief is based on taxes. Experts believe that individual investors sell losing positions near the end of the year to recognize capital losses that could reduce their tax bill.
IRS’ rules require waiting 30 days to record that loss. So experts insist there should be new buying in the first part of the new year.
At least one study confirmed this theory.
In 1983, a researcher found that small-cap stocks deliver abnormally large returns in January. This is known as the January effect.
This was true in 1983. But markets change.
Over the past 25 years, January has been the worst month for small caps. The S&P 600 Small-Cap Index delivered a gain just 48% of the time in January.
Despite this new evidence, many investors still believe that small caps outperform in January. This shows how difficult it is to follow current research.
Fortunately, here at Smart Profits Daily, we have a renowned former hedge fund trader who’s an expert at tracking and profiting from the success of small-cap stocks.
My friend and colleague Ian King will present his latest research next week on Thursday, October 29, at 1 p.m. Eastern time.
He will reveal his small-cap strategy that helps identify small, innovative companies that could become the next Tesla, Amazon or Apple.
He’ll also share details on three of his favorite small-cap stocks to invest in right now.
Space to this online event is limited, so claim your free seat now by clicking here.
Michael Carr, CMT, CFTe
Editor, One Trade