Monitoring Small-Cap Signposts

After years of underperformance, in August of 2025, small-cap technical indicators flashed inflection signals that weren’t seen since the 2021 rally.

At the time, Federal Reserve Chairman Jerome Powell suggested rate cuts were coming, implying a positive change and/or rotation into small-cap stocks could be on the horizon. This Special Report highlighted key technical signposts for why small caps likely deserved consideration, and at what point a more aggressive stance was warranted.

The dichotomy between large- and small-cap performance persisted into the second half of 2025. Small-caps trailed large-caps by nearly 8 percentage points year-to-date (YTD) through August 25, 2025, but technical indicators suggested this gap was closing.

• S&P 500 Index (large-caps): +9.48% YTD as of August 2025
• S&P 600 Small-Cap Index: +1.55% YTD as of August 2025

Small-cap breadth (lower chart) held near all-time highs, while price (upper chart) lagged, a pattern historically associated with sustained advances.

Small-cap underperformance was largely attributable to the higher interest rate environment, which makes smaller companies' balance sheets less attractive, as they must borrow more frequently to grow and face less favorable debt terms than large, established companies.

1. Market Breadth: The Advance-Decline Line eclipsed its June 2021 former all-time high in October 2025 and has continued higher since then.
2. Demand Intensity: The percentage of smaller stocks contributing to index gains rose significantly. In addition, internal weakness as measured by the Percent of Small- and Mid-Caps 20% or More Below 52-Week Highs contracted. This means that Demand for the weakest stocks expanded, indicating that all strength levels of smaller stocks were engaged in the rally, with a healthy risk appetite apparent.
3. Relative Strength: Broke short-term downtrend vs. the S&P 500.

The full report includes detailed charts showing historical precedents from 2021 and 2023, plus specific-sector Power Rating analysis.

• Gradually build small-cap positions while remaining selective
• Monitor for breakouts to new highs in price, accompanied by strong technical indicators
• Focus on the five heaviest-weighted sectors (see below)
• Wait for clear confirmation of sustained breakouts before becoming more aggressive

The technical setup for small-caps is the most constructive it's been in over a year. While confirmation through breakouts is still needed, the risk/reward for gradually building positions in the five key sectors (Financials, Industrials, Information Technology, Consumer Discretionary, and Health Care) is becoming increasingly attractive.

Lowry Research has provided institutional-grade technical analysis since 1938, tracking market breadth and demand indicators through multiple market cycles.