Are You Brave Enough to Buy This? By LUCAS DOWNEY, CONTRIBUTING EDITOR, TradeSmith Daily Most investors aren't surprised by how high stocks can rise. We've all seen the multi-year charts of major benchmarks seemingly climbing year-in and year-out.
We get used to it. Investing tends to be boringly up and to the right over long periods...
So those breathtaking meltdowns along the way naturally get most of the attention.
Anyone holding a portfolio of stocks during the last three weeks can relate... myself included!
In 2006, my first year on Wall Street, I learned quickly that "stocks take the stairs up and the elevator down."
The next two years were an incredible demonstration of that. Risk happens fast.
And while it's unsettling watching your portfolio melt down so quickly, green shoots ultimately sprout from the ashes.
Today, we're going to dive into one of the hardest-hit areas of the market: small caps.
They've been battered to a pulp... and two breadth indicators suggest that now's a rare opportunity to be greedy.
Just make sure you're focused on the best stocks... Small Caps Nearly Enter Bear Market Bear markets are defined by a pullback of 20% or more from highs.
The small-cap S&P 600 is kissing those levels with a peak-to-trough pullback of 19.1% in a little more than three months. Below I've used the iShares Core S&P Small-Cap ETF (IJR) for reference: 
The last three and a half months of price action erased an entire year of progress in the small-cap sector. Stairs up, elevator down.
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The Weakest Breadth Readings Since October 2023 I love studying market breadth. If you're unfamiliar with that term, it refers to the number of stocks in an index trading with positive momentum.
Breadth helps reveal the health of a market index. Great breadth indicates a healthy market where most of the stocks are enjoying upward momentum. Weak breadth indicates an unhealthy trend of downward price action.
With a swift 19% haircut in prices, breadth levels have plummeted. Similar to the semiconductor signal study we provided last week, we'll be doing a comparable measure today to gauge how weak small-caps truly are.
Whether you trade short-term or invest long-term, you'll want to check this out...
One of the most widely followed technical indicators is the 50-day moving average (DMA) and 200 DMA. These help us understand the near-term trend and longer-run view of any security.
Let's understand the shorter-term trend first.
By diving below the surface, Thursday revealed that only 13.67% of stocks in the S&P Small Cap 600 were above the 50 DMA.
That means 86% of the index is showing weak short-term breadth!
Why this is so interesting is simply due to fact that we haven't seen similar readings since October 2023... which happened to be the market bottom way back when.
See below: 
A couple of things should jump out at you from this graphic: - First, we tend to not stay at these levels for long...
- Second, when this line turns higher from these depths, it tends to move fast.
Now for my longer-term traders out there, let's perform the same analysis to the 200 DMA... a much slower moving line.
On March 13, just 21% of small caps were above their 200 DMA. Again, this is the lowest reading since October 2023: 
Whatever gauges you follow, I think we can all agree that stocks are washed out... and likely won't hang low forever.
The million-dollar question: Is now the time to catch the falling knife?
Let's look at the data, and I'll let you decide.
First, let's study how stocks perform when the number of S&P Small Cap 600 stocks that are above their 50DMA is 13.75% or lower... similar to today's reading.
I was able to find 227 prior instances. Here's what happened next: - 3 months later, small caps jumped 8.3%
- 6 months later, they ripped 14.8%
- 12 months after, you're staring at 29.9% average gains
Impressively, 6 and 12 months after, you have a positive hit ratio above 85%. 
This study clearly says stocks should head higher in the months ahead. Now, let's take it step further and check in on the 200 DMA.
Similarly, back to 2000 I pulled together all instances when the percentage of S&P Small Cap 600 constituents above their 200 DMA was 21.1% or lower.
I found 385 discrete instances.
Here's what happened next: - 3-month gains of 7.7% followed
- 6 months later saw 16.2% returns
- 12 months after, you're looking at 29% gains
It's a bull signal for the brave! 
So what are you supposed to do with this information?
You might think you should run out and buy the S&P 600.
But, as our CEO Keith Kaplan recently pointed out, the S&P 600 benchmark just triggered a rare bearseye signal. This is our proprietary measure of a broad-based bear market, based on breadth and other momentum factors.
More often than not, when this happens, stocks are lower before they trigger a new bullseye signal.
So, from where I stand, you shouldn't run out and buy the entire group.
Instead, you should isolate the rare few S&P 600 small caps that ARE trading well.
These are the all-star stocks that are bucking the trend right now.
I can show a few of them to you right now. Here's a quick screen I ran on the S&P 600 small cap index. I simply filtered out any stock that isn't trading in the TradeSmith Green Zone – our unique measure of positive momentum based on a stock's individual volatility. I also made sure to only look for stocks that score a 70 or above on Jason Bodner's Quantum Score – a ranking system that seeks out the top 1% of high-quality, positive-momentum names that deliver much of the market returns. Here are the top 5 results... 
All of these small-cap names are worth a close look. They rate well on Jason's system, they're all still in the Green Zone, and they have been for many months. There are small caps worth buying out there... You just have to do a little work to find them.
And make sure you do that work now. Because eventually the green light will flash...moving averages will explode higher.
Don't be left behind.
The small-cap sector took the elevator down to the basement.
If you ask me, that's an opportunity to pick the best names for the ride back up. And one of the best systems out there to do that in Jason's Quantum Edge Pro algorithm.
For more info on Quantum Edge Pro, including how you can get Jason's top curated picks in your inbox, click here. Regards,
Lucas Downey
Contributing Editor, TradeSmith Daily P.S. Another group of small- and mid-caps taking off right now is the quantum computing group.
And that's exactly where Louis Navellier – a senior analyst at InvestorPlace whose work I've respected for years – is looking for the next Nvidia (NVDA) with 50X profit potential.
In his free briefing on the subject Thursday, Louis covered: - Nvidia's Quantum Day (Q Day) event this Thursday.
- The revolutionary shift quantum computing will bring to AI.
- The single stock he believes could deliver a 50X return – like Nvidia did once the AI Revolution took off.
You can check out the replay of the Next 50X NVIDIA Call right here.
It's great timing, because not only are quantum computing stocks surging after D-Wave (QBTS) said it has a quantum computer that can run a "simulation in minutes that would take nearly 1 million years to solve using a classical supercomputer"...
You still have a couple days left to view Louis' presentation before it's taken down. Click here to watch now. | 
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