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A Major Theme That Will Carry Equities Higher

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I believe the bull market vs. bear market debate has ended. We've been through a trade war, 100-year pandemic, an economic shutdown, a very divisive political battle, mountains of debt, etc., and where do we stand? At an all-time high. That should convince you that we're in a secular bull market. Here's the BIG PICTURE chart that I review periodically with our EarningsBeats.com members as a reminder that prices are going higher:

We're going higher, so the next step for me is finding the best area(s) to outperform the benchmark S&P 500.

Small Caps Will Provide Leadership In 2021

We're already seeing it. The relative uptrend in small caps began when the S&P 600 Small Cap Index ($SML) surged to a triple-top breakout with the positive vaccine news on November 9th, 2020. First, check out the absolute price breakout on the $SML. Then, in the panel below, look at how small caps surged higher relative to the benchmark S&P 500:

You might look at this chart and think that the money has already been made in small caps. I believe it's just started. If you look at a longer-term weekly chart, you'll realize there's plenty more upside ahead:

As small caps gain more and more steam to the upside, it'll be important to follow the areas of small cap strength. In other words, which sectors will breed the most small cap success? Currently, it's small cap energy (PSCE), but I also really like small cap technology (PSCT) and small cap discretionary (PSCD). You can see these three groups performing well relative to the S&P 600 Small Cap Index ($SML) on an RRG chart:

4 small-cap ETFs are located in that leading quadrant. The PSCE (energy) has been flying and likely needs a rest, but the PSCT (technology) is seeing its relative strength accelerate, while the PSCD (discretionary) has circled back into the leading quadrant from weakening, which is a very bullish move. Technology and consumer discretionary are generally leaders during a secular bull market. It only makes sense to expect these two small cap areas to perform well, so long as small caps remain in an uptrend vs. large caps.

The Draft

Every three months, we have a "draft" to select 10 equal-weighted stocks that will comprise each of our 4 portfolios. We just completed our 9th quarter in our Model Portfolio and we've beaten the S&P 500 in 8 of those 9 quarters by focusing on the combination of strong fundamentals and strong technicals. Our 2 year, 3 month return of +251.78% has crushed the S&P 500's return of +45.19% over the same period.

On Sunday, February 21st, I'll announce our "draft picks" to fill out our 4 portfolios. If you'd like to join me for this exciting event, please CLICK HERE to start your no-cost 30-day trial. I'll also be featuring a favorite small cap stock of mine in our free EB Digest newsletter on Monday morning. If you'd like to subscribe to this 3x per week newsletter (no credit card required), simply provide us your name and email address HERE.


Happy trading!

Tom

Tom Bowley
About the author: is the Chief Market Strategist of EarningsBeats.com, a company providing a research and educational platform for both investment professionals and individual investors. Tom writes a comprehensive Daily Market Report (DMR), providing guidance to EB.com members every day that the stock market is open. Tom has contributed technical expertise here at StockCharts.com since 2006 and has a fundamental background in public accounting as well, blending a unique skill set to approach the U.S. stock market. Learn More
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