Will Fed Rate Cuts Spark a Small-Cap Stock Rally?
During the Aug. 22 Market on Close livestream, host John Rowland, CMT, made an important observation: while everyone’s watching mega-cap tech, small-caps just broke out. With the Russell 2000 ETF (IWM) up only 6% on the year, traders may want to consider which sectors could lead the stock market if profit-taking hits tech — particularly as the Fed edges toward rate cuts.
Why Small Caps Deserve Attention
Breakout levels matter: John noted IWM has cleared his breakout zone and is now trading about 4 points above it, with an Average True Range (ATR) of ~4 points. That’s a clean signal of momentum building.
Rate sensitivity: Smaller companies are highly sensitive to borrowing costs. If the Fed delivers even a modest series of cuts (John mentioned up to 50-75 basis points by year-end), small-caps could benefit disproportionately.
Broadening market: Tech has carried the S&P 500 Index ($SPX) for months. A breakout in IWM suggests breadth may finally be improving.
Other Sectors on the Radar
- Industrials: Lower financing costs can spur capex and infrastructure-related growth.
- Financials: Rate cuts can revive lending and credit demand, especially for regional banks.
- Homebuilders: If mortgage rates drift lower, demand could rebound.
John highlighted these sectors as other potential beneficiaries of a September policy shift.
How to Trade It Using Barchart
Step 1: Build watchlists
- Add ETFs like IWM, S&P Industrials (XLI), Financials (XLF), and Homebuilders (ITB) (XHB).
- Save top ETF holdings as sector watchlists to track leading stocks.
Step 2: Run screeners
- Use the ETF Screener → filter by sector, performance, RSI, and volume.
- For IWM stocks: use the Stock Screener to filter by RSI 40–60, 50-DMA > 200-DMA, and Avg. Volume > 1M.
Step 3: Validate setups
- Open Flipcharts with a simple template: 20/50/200-MA + RSI + ATR.
- Confirm breakouts with volume and RSI moving higher from mid-zones.
Step 4: Monitor signals
- Use New Recommendations and Top Trade Alerts for fresh signals.
- Turn on alerts for daily screener results and key price levels.
Bottom Line
Markets may be “getting ahead of themselves,” as John put it. But if the Fed cuts rates, leadership could rotate. Industrials, financials, homebuilders, and especially small-caps are all worth watching.
Watch the Market on Close clip for John’s breakdown:
Explore the ETF Screener & ETF Finder under the ETF tab at Barchart to find, screen and monitor sector opportunities.
On the date of publication, Barchart Insights did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.