Here's the Next Sector Ready to Explode to New Highs...

The Dow dropped 77 points yesterday.

No one batted an eye.

I can’t say I’m surprised. No one cared when the Dow topped its all-time highs earlier this month. Despite the cries from the financial media about lackluster earnings and geopolitical strife, most folks aren’t giving the stock market the time of day right now—no matter how many records it shatters.

The Dow Jones Industrial Average posted its seventh record close in a row on Wednesday. That was the big board’s longest run of all-time highs since an eight-session stretch in March 2013, MarketWatch reports.

With the market running red-hot this week, investors (the ones that aren’t sleepwalking through summer) who missed the breakout are desperately waiting for a pullback. During the Dow and S&P’s rise to new highs, most folks refused to believe that the run could last. Zor Capital managing director Joe Fahmy perfectly sums up the sentiment picture in one tweet:

Joseph Fahmy Tweet

Now that stocks are in uncharted territory, these folks are kicking themselves for missing all the fun…

Of course, the major averages can’t move up in a straight line forever. They’ll eventually settle down like they always do. But that doesn’t mean a bigger move higher is out of the question.

For starters, where are the new highs? So far, we’ve seen the Dow and the S&P 500 post new all-time highs. That’s it. If you’re laser-focused on the major averages, you’re going to miss out on some big moves in the coming weeks.

Here’s the deal…

Markets rotate. There’s a new sector springing back to life every single day. As we said earlier this week, the opportunities keep rollin’ in. During the resurgent bull, we’ve hopped aboard powerful comeback trades in airlines, coal, solar, tech, social media, fast food and natural gas. And that’s just this month!

Your next trade will probably come from a sector that hasn’t jumped to new highs yet. Remember, many groups of stocks endured brutal bear markets over the past year—even as the major averages treaded water. These are the corners of the market that will provide some of the best opportunities to book gains when the major averages run out of steam.

Check out small-cap stocks. As the market launched off its lows earlier this year, small-caps began to quietly lead the market higher. Now that the major averages have blasted to new highs, we should see these stocks spring back to the front of the pack.

The Russell 2000 has jumped 4.5% so far this month, compared to a 3% gain in the S&P 500. The small-cap index has a lot of work to do before it can sniff its all-time highs. Here’s a long-term view:

Russell2000-DR

The Russell 2000 still has to post an 8% rally before it can top its June 2015 highs. The index is just clearing its early December highs this week. This move should help slingshot small-caps higher while the major averages start to blow off some steam.

With a rising tide working for us, we should have no trouble riding the next wave of gains as small stocks roar back to life…

Sincerely,

Greg Guenthner
for The Daily Reckoning

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