The 5 Small Caps to Own in a Lower-Rates World VIEW IN BROWSER
By Michael Salvatore, Editor, TradeSmith Daily In This Digest: - The Fed gets it over with
- TradeSmith’s software gives small caps the green light
- These are the top tiny names for your watchlist
- How Andy and Landon Swan crushed earnings season
- Our flagship tech is still beating the billionaires
Finally, after months of anticipation, the Fed got it over with… Yesterday, the Fed cut rates by a quarter of a point, as most expected. It was the first cut since last December’s quarter-point cut and one of the longest delays between consecutive cuts of the 21st century. Now, if you’ve followed my call for 2025 ending with no rate cuts, you might currently hear the satisfying sizzle of a fried egg on my face. As always, I’ll wipe it off – maybe have a bite – and get back to work. Because at the end of the day, you have to trade the market in front of you… not the one you think it should be. Our job at TradeSmith is to help you make the most of every trading day with world-class technology, and that’s what we’ll do today. Lower rates mean we should own hard assets like gold and Bitcoin – and financial assets like stocks – especially small caps, for reasons I’ll soon get into. If we see higher inflation, that goes double. And it means we should spend our dollars like they’re going out of style. That’s where a lot of the newsletter analysts stop their takeaway. It’s where TradeSmith starts. We’ll talk more about those hard assets in a future issue. Today, let’s focus on the opportunity in small caps, using TradeSmith’s hedge-fund-caliber tools. Recommended Link | | | | TradeSmith’s Keith Kaplan is Wall Street’s worst nightmare. His Baltimore-based company has engineered a device that helps regular folks decide when to buy and sell based on mathematics, not emotion. “We’re leveling the playing field,” says the disruptive CEO. Click here to see it in action. |  | |
Here’s a reason to buy any short-term weakness in small caps… Dedicated readers know how important small-cap stocks are to the rate cut story. Small-cap companies (from $300 million to $2 billion) tend to borrow based on the Fed’s short-term rate. That means lower borrowing costs go directly to their bottom line, helping them grow. Small caps have had a nice run over the last few weeks in anticipation to this rate cut. Since Aug. 21, the day before Fed chair Jerome Powell hinted at interest rate cuts during his Jackson Hole speech, the S&P SmallCap 600 Index is up nearly 4% and at its highest level since February. (We’re tracking the S&P 600 because unlike its cousin, the Russell 2000, this index weeds out unprofitable companies.) But as we always do at TradeSmith, let’s dissect this move… An important part of TradeSmith’s software suite is monitoring market indexes. Most people turn on Bloomberg and see that the S&P 600 is up or down 1% on the day and stop there. There’s not much value in that. We go deeper. We’ve talked before about how TradeSmith’s Volatility Quotient (VQ%) is the core of everything we do. By tracking a stock’s historical volatility, we can confirm whether a stock’s price performance is healthy relative to that volatility. Think of VQ% as a car’s “speed limit.” Some cars are built for 70 mph on the highway. Others rattle if you take them past 50. By knowing the limit for each stock, you know when it’s cruising normally – and when it’s careening out of control. The same way, some stocks are expected to have higher volatility – like Tesla (TSLA) with its 48.7% VQ%. And others are expected to have low volatility, like Kroger (KR) and its VQ% of 17.2%. If KR takes a 17% bath, something has gone very wrong, and it’s time to sell. You’d accept a lot more volatility in a stock like TSLA. But if any stock is trading well above its VQ% sell level, it’s in a healthy state. With VQ%, we can look at the percentage of healthy stocks within an index. Let’s take a closer look at the small-cap S&P 600. Since Aug. 21, the number of S&P 600 small-cap stocks in the TradeSmith Green Zone has surged from 61.1% to 67.6%. This shows small-cap Health is improving. 
Importantly, it did this nearly a month before the rate cuts. Traders piled into these small-cap stocks, pushing them into the Green Zone ahead of the rate-cut news. This has happened a few times before ahead of rate cuts. And by looking back at those past signals, we can get a good read on what may happen in the future. In this case, the small-cap index health improved at this rate or more only 89 times since the year 2000. And on average, the S&P 600 was 6.5% higher over the next 21 trading days. A move like that puts the S&P 600 near all-time highs by mid-October. Funny enough, that happens to be right near the start of the Q4 bullish seasonal period… Starting Oct. 19, the S&P 600 has an average return of 6.1% through Dec. 3 with gains in 14 of the past 15 years. As you can see below, this qualifies for our Optimal seasonality pattern – some of the strongest seasonal trends we track: 
Longtime readers will recall that TradeSmith’s software can identify hidden seasonality patterns in stocks and stock market indexes – windows of time when stocks tend rise or fall year after year. The message from our software is clear: Own more small-cap stocks than you have before and get ready to ride them into year-end. But which small-cap stocks should we buy? I’m glad you asked. TradeSmith’s software has a great solution for that, too. Let’s revisit our Rate Sensitive Small Caps screener that we designed a few weeks ago. 
This screener filters the thousands of stocks we track down to just those in the main small-cap indexes, the S&P 600 and the Russell 2000. It also looks at five rate-sensitive sectors: Technology, Financials, Real Estate, Cyclicals (or discretionary stocks), and Utilities. (These sectors have all historically done well in lower rate environments.) Like our small-cap study, it’s looking for stocks in the Green Zone. But most important, it pulls up stocks with a Quantum Edge score of more than 85 – the top tier of stocks in the market. The Quantum Edge score was designed by our resident growth investing expert and former head of equity derivatives at Cantor Fitzgerald, Jason Bodner. Jason designed this system after brokering massive deals for Wall Street’s biggest institutions. He learned what kind of stocks they buy, and the telltale signs they’re buying them. He quantified this approach into a score. The higher the score on a scale of 0-100, the better the stock. This screen spoils our users for choice with 66 results. But let’s look at the top five: the best of the best small-cap stocks in rate-sensitive sectors. They are: - WisdomTree (WT)
- OSI Systems (OSIS)
- The Bancorp (TBBK)
- Clear Secure (YOU)
- Credo Technology Group (CRDO)
Keep these names on your watchlist. There’s big opportunity in small caps right now, but our data suggests the biggest is in these top five. Another option is to get trading… As the immortal bard Yogi Berra put it, “It’s hard to make predictions, especially about the future.” And the longer you go out in time, the harder it becomes. So why not instead try to accurately forecast what’ll happen in… oh, how’s a week (or less) sound? That’s what colleagues Andy and Landon Swan do in their Earnings Season Pass advisory. Over just the last couple of months, subscribers have made: - 92% in five days betting against Ulta Beauty (ULTA) earnings
- 105% in three days on DocuSign (DOCU), betting earnings would surprise to the upside
- 100% in one day betting longtime favorite On Holdings (ONON) would outperform
- And 15% on 4 days in Adobe (ADBE), with another bull call
Andy and Landon founded LikeFolio, a social analytics company that uses a unique data feed – social media and web traffic – to gain an edge on their trades. When applied to earnings, this data reveals insights Wall Street doesn’t see: a window into Main Street. And when you pair this insight with a special type of options trade that targets quick, double-your-money wins like the ones above… you have a recipe for a market-beating strategy. Andy and Landon are another example of how TradeSmith uses data and analytics to give our subscribers an edge. And if you like their work, I encourage you to tune in to tomorrow’s Daily. There, we’ll release a new video with Andy and Landon all about an alarming trend in the energy sector. Most investors are asleep at the wheel on this. So we’ll show you what’s going on and, more important, how a major U.S. catch-up play could be the best trade for 2026 and beyond. Don’t miss it. Before we go, an essential reminder… Just as important as buying the right stocks is knowing the right time to sell them. You haven’t made any money in stocks until you’ve taken profits. And for most people, it’s difficult to figure out when to do that. So difficult, it can cause big wins to slip through your fingers… or worse, turn into big losses. TradeSmith was founded on finding the solution to this universal problem. And we’ve created a software tool to solve it: Kinetic. It’s a way for you to trade with confidence, lock in returns, and sleep well at night – no matter what kind of stocks you own. And recently, we applied this to the portfolios of the world’s most successful investors. What we found didn’t shock us… but it might shock you. This tool improved the performance of the Magnificent 7 by more than 28%. 
And it doesn’t just improve the performance of this group of mega-cap tech stocks. We applied this same tool to the portfolios of some of the world’s best investors… and found it nearly doubled their performance. It took the portfolio of Warren Buffett, one of the biggest investment successes of all time, and turned his 393% return since 2000 into a return of 760%: 
It took billionaire hedge-fund manager Ray Dalio’s performance from 152% since 2007 and turned it into 359%: 
And it took Wall Street legend David Einhorn’s return of more than 794% since 2002 and turned it into a gain of more than 1,125%: 
All with a simple piece of software. Our CEO, Keith Kaplan, recently gave an on-stage presentation about how this software has evolved over the years. Including how you can use it today to find winning stocks, have the right exposure to them, and sell them at the opportune time. To watch his presentation for free and learn how to use Kinetic to improve your returns, go here now. To building wealth beyond measure, 
Michael Salvatore
Editor, TradeSmith Daily (Michael Salvatore held GOOGL, META, TSLA and NVDA at the time of this writing.) | 
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