The Great Rotation

Current Market Sentiment: The rally in small-cap and value stocks appears sustainable.

Trading Strategy:
1. Underweight Large Caps:
o Expecting a potential 5% upside for the cap-weighted S&P 500 driven by rotation in leadership and broader market participation.
2. Overweight Large Cap Value/Midcaps:
o Potential for a 12% upside in the equal-weighted S&P 500, likely to outperform for the rest of the year.
o Consider RSP (Invesco S&P 500 Equal Weight ETF).
3. Overweight Small Caps Core:
o Anticipating a 12% upside in the small-cap S&P 600.
o Consider IJR (iShares Core S&P Small-Cap ETF).

Historical Perspective:
Historically, sharp movements where small-caps outperform large-caps by a significant margin have aligned with market bottoms, not the onset of new bear markets. While we are not at a broad market bottom, there are arguments for a bottom in small-cap/value stocks.

Market Dynamics: This rotation has a slight flight-to-safety undertone, manifesting as a shift from growth to value stocks rather than from stocks to bonds. As rates fall, we can expect a bond bull market. Once investors realize gains in bonds, the shift from bonds to equities typically occurs. This second phase can further propel these undervalued areas forward.