While technology stocks suffered heavy losses, small-cap stocks that have been lagging for a long time have rebounded sharply. The e-mini Russell 2000 index has a ROI of 12% since this month.

For stocks, this month is a rough one. Although no one likes volatility, recent trends have helped correct the seriously out-of-sync market. A new and more stable market situation may lay the foundation for further gains for investors later this year.

In 2024, the stock market seems to be soaring all the way. As of July 16, the S&P 500 index has jumped nearly 19% this year, setting a historical record, but it ran into a wall this month, including the largest drop in over a year last week. On Monday, the index rose 0.06%, or 3 points, to 5462 points.

One factor is the sudden turnaround of the US presidential election. Trump dodged an assassination on July 13, and Biden dropped out of the election more than a week later. But the more important factor may be the concern about whether the future AI profits of technology companies can match their high stock prices. The so-called 'Big Seven' technology stocks have been a driving force in the market for the past few years, but they have now fallen by nearly 12% from their mid-July high.

Fortunately, for investors, this huge drop has not sparked discussions about bear markets or even corrections. On the contrary, the wall street maxim is 'rotation'.

While technology stocks suffered heavy losses, small-cap stocks that have been lagging for a long time have rebounded sharply. The e-mini Russell 2000 index has a ROI of 12% since this month. Large cap stocks that have performed poorly, such as real estate, materials, and utilities, have also performed well. A research report by Bank of America Securities on Monday summed up: 'A comprehensive bear market is unlikely to occur. Rotation is the key'.

The overall resilience of the market may not necessarily come as a surprise. Last week's GDP figures for the US economy were unexpectedly strong. More than three-quarters of the companies that released second-quarter earnings reports exceeded analyst expectations. In addition, the inflation situation seems to have stabilized, which makes investors more confident that the Fed will begin one or more interest rate cuts in September.

Investors should see this rotation as a stroke of luck and hope it continues. This will allow the technology industry - which has become a dangerously inflated presence in the market - to adjust its size without causing the kind of wholesale market collapse that followed the dot-com bubble in the 90s.

This is already happening. According to independent market researcher Jim Paulsen, this month, the share of the 'Big Seven' in the total market value of the S&P 500 index has dropped from 34.4% to 31.6%. He pointed out that while this percentage is still high, it is closer to a sustainable level of 30% that has been hovering since the substantial growth earlier this year.

This dynamic mirror effect also seems to be occurring in small-cap stocks. At the beginning of this year, the proportion of small-cap stocks in the large-cap Russell 3000 index fell from nearly 9% in 2006 to a historic low of 5.2%. FactSet data shows that as of last Friday, the share of small-cap stocks has rebounded to about 6%.

How can you position yourself for the future? A simple step is to look at your index funds. In the past month, the ROI of Vanguard Total Stock Market ETF was 0.7%, nearly one percentage point higher than VanguardS&P 500 ETF, which fell 0.2%. The ETF invests 8% of its assets in small-cap stocks, while the S&P 500 index ETF invests less than 1% of its assets in small-cap stocks.

This lesson seems obvious, but it seems that many investors have not learned it. Data from VettaFi shows that the $409 billion Vanguard Total Stock Market ETF is the fourth largest exchange-traded fund on the market. The top three are all S&P 500 index funds, with a total holding of more than $1.5 trillion. (To be fair, some of the investors who hold S&P 500 index funds may be institutional investors or paired with individual small-cap ETFs (although not all)).

If investors want to be more proactive and bet on the rotation of technology stocks to a greater extent, they can choose equal-weighted ETFs, such as Invesco S&P 500 Equal Weight ETF, which downplays the role of technology stocks in the market by measuring each company in the investment portfolio with the same weight. Of course, there are also small-cap fund options, such as Vanguard Russell 2000 ETF or iShares Core S&P Small-Cap ETF, which screen for the profitability of holdings.

However, chasing returns also comes with risks. Small cap stocks have risen by 10% in the last few weeks, and even if the economy continues to perform well, they are unlikely to set new records. The best way to adjust your investment portfolio for the rest of this year may be to let it readjust on its own, as long as your investment is not too heavily weighted towards technology stocks and you hold at least some small cap stocks.