When a decline gets too stretched, it shows the asset is "oversold." A snapback rally usually follows. And that makes the RSI a useful contrarian indicator.An RSI below 30 is considered oversold. And the Russell 2000's RSI recently plunged to 24. Take a look...
The Russell 2000 crashed. But according to the RSI, this move is likely overdone... And small caps are likely to rebound from here.History agrees. To see it, I tracked what happened with small caps whenever the RSI made similar moves... specifically, when it fell below 25 and then rose back above that level.We've seen 27 similar setups over the past 46 years. And according to history, those were darn good times to buy. Take a look...
Small-cap stocks have been a good long-term investment. Using a typical buy-and-hold strategy, they've grown 8.7% per year since 1979. But if you bought after an RSI setup like we have right now, you could have done much better.Similar instances led to 6.7% gains in six months and 17.4% gains over a year. Plus, the Russell 2000 was up a year later 70% of the time.
