Tech Crushing Small Caps: Uncovering the Massive Trading Opportunity Hidden in This Chart

[Image] Tech Crushing Small Caps: Uncovering the Massive Trading Opportunity Hidden in This Chart Listen. You need to hear this… The Nasdaq 100, the tech-heavy index, is outshining its small-cap counterpart the Russell 2000, which is often seen as a thermometer for the health of the US economy. And when I pull up the spread chart comparing the two, the difference is more than evident — it's utterly staggering… Take a look: Top Chart: Russell 2000/Nasdaq100 Comparison (YTD) Bottom Chart: Long Nasdaq 100/Short Russell 2000 Performance (YTD) Source: Bloomberg Why should you care about this? Because I think there’s a massive trading opportunity hidden in this chart. Curious? Keep reading and I’ll show you what I mean… Tech Crushes Main Street Let’s give this some context… It’s not necessarily surprising that tech stocks are strong, but the enormous gap between tech and small caps is. The Russell 2000 reflects the heartbeat of Main Street USA, encompassing a wide swath of sectors and smaller firms more sensitive to domestic economic stresses. Meanwhile, the giants in the Nasdaq — those mega-cap tech companies — are so well-capitalized that they continue to march to the beat of their drum. Big-tech traders are seemingly turning a blind eye to the 'macro backdrop,' including things like employment rates, consumer spending, or industrial production. Will this trend continue? We’ll get there. But first, we need to address the root cause of this move… Why is This Happening? There are a few reasons. For one, mega-cap tech companies often have more global reach and diversified revenue streams than the names in the Russell 2000, which can insulate them against U.S.-centric economic concerns. Furthermore, they tend to have more robust balance sheets, which help them weather economic storms and continue to invest in growth (even when times are tough). On the other hand, smaller companies in the Russell 2000 may struggle more immediately with rising costs of borrowing money and serving their debt, supply chain issues, or lower consumer spending. With the prevailing interest rates appearing to stabilize for the moment and treasury yields — a common measure of government debt cost — taking a dip, the gap between the Nasdaq 100 and the Russell 2000 could indeed keep growing. The logic is straightforward: when yields fall, investors may chase higher returns, which can often be found in the growth-oriented tech sector. What Does This Mean for Traders? Considering the current trend, I have an idea: pairs trading. In other words, going long on the Nasdaq and short on the Russell 2000 simultaneously. By being long on the Nasdaq, you can benefit from any continued strength in tech stocks. Conversely, by shorting the Russell 2000, you’ll profit if the index continues to decline or underperform the Nasdaq. Before you rush into a pairs trade, it's important to remember that trading based on index performance is not without risk. There are no guarantees in the stock market. While the trend may continue, markets are unpredictable and subject to rapid change due to unforeseen events or shifts in investor sentiment. Additionally, buying the growth names amidst a disregarded macroeconomic environment can sometimes lead to volatile outcomes. As tech stocks have higher valuations and growth expectations, they are more susceptible to price swings when those expectations aren't met (or when market conditions change). The party could end at any time. That said, the trend is your friend. For now, going long on the Nasdaq and short on the Russell 2000 is one of the best trades I’m seeing. Closing Thoughts Will this spread continue to widen, with technology companies pushing forward, regardless of Main Street's challenges? For the time being, I think the answer is yes. But if you’re considering this strategy, it's crucial to monitor market trends, analyze economic indicators frequently, and be prepared to adapt to changes. Understanding your risk tolerance remains a key principle in managing any strategy, especially in times of significant divergence between the major indexes. As we move through 2023 with these strategies in play, you must stay vigilant, keep your fingers on the pulse of market shifts, and be ready to pivot as new information arises. And, as always… Stay Street Smart, Jeff Zananiri P.S. After teaming up with a rogue Wall Street insider, and spending over $1 million on research and development, Tim Sykes is finally revealing his patent-pending AI-powered trading system for the very first time! Wanna see this brand-new, game-changing trading system? 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