To The Moon

The recent Fed meeting, while lacking the immediate rate cuts some were hoping for, has planted a seed of optimism for small-cap investors like myself who are bullish on small-cap stocks.

Chairman Powell's acknowledgement of the possibility of a future rate pivot is a significant development. The Federal Reserve is data-driven, and with inflation seemingly peaking, a shift towards lower interest rates is a distinct possibility in the coming months. This is music to the ears of small-cap investors. Historically, smaller companies tend to outperform their large-cap counterparts in low-rate environments. This is because they typically rely more on access to credit to fuel growth. With borrowing costs potentially falling soon, the nimbleness and innovation often found within small businesses could be unleashed, propelling the companies that make up $iShares Russell 2000 ETF(IWM)$ to significant gains.

The sentiment surrounding rate cuts is already starting to take hold. Financial analysts are revising their forecasts, with some predicting a banner year for small caps, with IWM potentially surpassing the returns of the S&P 500. This positive sentiment could very well become a self-fulfilling prophecy, attracting more capital to the small-cap space and further fueling the potential rally.

IWM Weekly Chart

Shifting to technical analysis, a breakout above $208 could be a significant bullish signal for IWM. This price level could act as a psychological barrier, as overcoming this resistance could trigger a sustained move back towards the 2021 price range. However, it's important to manage expectations. Some investors who bought in at the 2021 highs might look to exit their positions at breakeven. This climb is unlikely to be a straight shot to the top.

While I'm firmly bullish on the long-term prospects of IWM, I'm also a believer in taking a measured approach. There's a good chance we'll encounter choppy waters ahead. Those 2021 bag-holders looking to exit their positions could create resistance points along the way. This potential for short-term volatility shouldn't overshadow the long-term opportunity. I'm prepared for a slow and steady climb rather than a meteoric rise.

The biggest risk to this bullish thesis is a sudden change of course by the Fed. If inflation remains stubbornly high or unforeseen economic factors emerge, the Fed might delay or even reverse any plans for rate cuts. This could dampen investor enthusiasm for small caps, and IWM could experience a pullback. However, the Fed's data-driven approach and the potential for inflation to cool as supply chain issues ease suggest this risk is manageable.

Besides IWM, you can look into $Vanguard S&P Small-Cap 600 ETF(VIOO)$ or $iShares S&P Small-Cap 600 Value ETF(IJS)$ that tracks the S&P 600 small cap instead of Russell 2000, which some argued to be more volatile. Personally, I am invested in one company which will be added to S&P 600 on 8 May - $Marathon Digital Holdings Inc(MARA)$. I will not be going into details here about the company as I already shared my bullish thesis in another post.

Read my previous article: Why I am Bullish On MARA

MARA 20250117 30.0 CALL

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Disclaimer: This post reflects my personal opinions and should not be considered as financial advice. Always conduct thorough research before making any investment decisions.