So at the drop last Friday (12/7, thurs in the U.S.), the interesting thing is the small and mid caps actually rose. By a lot.

RUT was +3.6% while NDX was -1.6%, so that was a super clear sign things are “rotating”.

Why and what’s my next move?

The reason behind the rotation

The big event that happened was CPI data, which was weaker than expected.

The probability of a Sept rate cut is now 80%+, up from 60% before the data release.

Beside the increase in the rate cut probability in Sept, the whole market sentiment at this point is, it’s really going to go from a cycle of monetary tightening to easing.

And lower borrowing costs really boost small and mid caps which are more cash-poor and requires borrowing.

The high interest rate environment has beaten down the small caps quite a bit this year, and the Russell 2000 went completely sideways in 2024 while nasdaq100 is up +25%.

Until last Friday and the RUT has accumulated 7% increase in just a matter of a few days (as of Tuesday):

– QQQM nasdaq-100 vs IWM Russell 2000 since Jan 2024

Obviously if I had shifted some into small caps before last friday it’d have been awesome.

I don’t even know enough to know the cause and effect of a rotation though so it’s good that this weekend helped me realize it.

My next move – rotating with the market + diversification

So I can’t say for sure the market will keep the rotation going, especially given if the interest rate or the whole market sentiment shifts again.

But I do know that it does make sense to diversify with some small caps now. Maybe having everything in NDX can yield better returns in the long run, but having a portion in small-mid caps can really help smooth things out and lower the volatility of the portfolio while still generating a decent return.

In the long-term, I think I’d like to have around 10-20% of US equities in small-mid caps – probably just leveraging IWM or similar ETFs.

For now I’m increasing it to around 25% perhaps until the end of the year or until somehow it seems the rally for the small-caps are over. Then I’ll rotate it back to QQQM perhaps.

Watching the interest rate movements and the market sentiment about monetary policy should give a good idea on where things are heading.