ASX Trader: Why the forgotten giants could be the next big wealth story

There’s a forgotten market giant riding a powerful tailwind from a deeply undervalued starting position. Smart money is pouring in and the gains could be life changing, writes ASX Trader.

Most investors have their eyes glued to the big end of town.

The banks, the blue chips, and the familiar household names that dominate the ASX 200.

But quietly, away from the spotlight, a much bigger story is beginning to unfold.

The ASX Small Ordinaries Index (XSO) and Emerging Companies (XEC) which tracks Australia’s small and micro-cap stocks has just sent a signal not seen in a very long time.

After decades of being forgotten, small caps may finally be ready to roar.

And if history is any guide, the potential gains could be life-changing.

The rotation has begun

Over the past four to six weeks, small caps have massively outperformed large caps.

This isn’t just a random burst of activity; it’s what traders and investors call a rotation.

Money is moving out of the big, safe names and pouring back into the smaller, higher-growth end of the market.

Across the ASX, dozens of small companies are breaking out of multi-year accumulation zones which are long stretches where prices went nowhere while investors lost interest.

Some of these companies have been building bases for a decade or more.

When they finally move, they tend to move hard.

In fact, we’ve already seen small caps start to leave large caps in the dust in recent weeks.

And history tells us that once these rotations start, they often run for years.

Small caps are leaving large caps in the dust.

Why small caps are different

Small caps are often described as the “forgotten giants” of the Australian market.

Unlike in the US, where smaller companies are dominated by technology and start-ups, Australia’s small-cap universe is heavily resource-driven.

That means miners, explorers, and companies tied to commodities like gold, oil, and base metals.

And right now, commodities are stirring in a way not seen since the early 2000s.

Charts across multiple resources are breaking higher, flashing the start of what many are calling a new commodity supercycle.

For small caps, this is a powerful tailwind.

These companies are smaller, more nimble, and more leveraged to growth than their larger peers.

When commodity prices rise, their profits can multiply rapidly and so can their share prices.

A market still stuck in the past

To understand just how underappreciated small caps are, consider this: the XSO is still 11 per cent below its pre-GFC peak in 2007.

Nearly 20 years of underperformance.

Imagine jumping into a time machine and buying the small-cap index in 2007.

That’s effectively where you’d be today.

But that’s the opportunity.

The big end of the market has marched higher over the years, while the small end has stagnated.

Now, with momentum shifting and money rotating back, the XSO is starting from a position of deep undervaluation.

Small caps still has not surpassed its pre-GFC peak.

Australia isn’t the only resource-heavy nation seeing this.

In Canada, small caps have just broken out of a 25-year consolidation.

Like Australia, Canada’s small-cap sector is dominated by miners and commodity producers. The fact that their market has finally burst higher is a powerful confirmation that this is not just a local story, it’s a global theme.

When multiple resource-driven economies start to see their smaller companies break out together, it usually marks the start of a much larger, global cycle.

The Canadian small caps index.

Looking back to look forward

On the monthly chart, the ASX Small Ordinaries (XSO) has formed a rare double bottom against the ASX 200 (XJO) with bullish divergence.

In plain English: after decades of underperformance, the tide may finally be turning.

Adding to this, the Stochastic RSI, a momentum indicator, has just reached deeply oversold levels on the quarterly chart and crossed back to bullish.

Every time this setup has appeared in the past, it has marked the start of a multi-year stretch where small caps outperformed (Green circles).

If this all sounds too good to be true, it’s worth looking back.

From 2000 to 2008, during the last major commodity boom, small caps didn’t just outperform, they went ballistic.

Explorers no one had heard of became billion-dollar companies, miners that had been forgotten suddenly surged as demand for resources skyrocketed, and investors who were positioned early saw returns of 20 times, 50 times, even 100 times.

The setup today looks eerily familiar, and with technical signals aligning alongside recent outperformance, the stage may be set once again for a cycle of extraordinary strength.

The XSO/XJO Ratio.

Should you worry about a crash?

Every investor worries about the same thing: what if the market crashes?

History shows that while corrections are inevitable, Australia’s market behaves differently from Wall Street.

When the US tech bubble burst in 2000, the NASDAQ fell 80 per cent.

By comparison, the ASX 200 fell just 22 per cent, while the XSO dropped 30 per cent. Painful, yes but far less catastrophic than overseas.

Crashes are part of the cycle.

But the bigger risk is sitting out and missing the extraordinary gains that often happen in between.

Those who waited for the “perfect moment” in the early 2000s missed out on the entire commodity boom that followed.

In other words, while the US market imploded, the Australian market zagged as part of a bigger bullish cycle.

America is overvalued. We are not as I wrote about here.

The window is narrow

Right now, the signs are all pointing in the same direction:

• Small caps have just massively outperformed large caps in recent weeks.

• Dozens of companies are breaking out of multi-year bases.

• Commodities are flashing bullish signals across the board.

• Global peers like Canada are already breaking out after 25 years.

This isn’t just a short-term rally.

It looks like the early stages of a deep structural shift, the kind that happens only once or twice in a generation.

For everyday investors, the takeaway is simple: don’t ignore small caps.

They may be riskier, but they also carry the potential for life-changing returns when the cycle turns in their favour.

Final word

Markets move in cycles, and right now, Australia’s small caps are showing all the signs of a new one beginning.

After 20 years of underperformance, the rotation is finally on.

These moments don’t come often but when they do, they have the power to reshape wealth for those who are ready.

Small caps are back. And this time, they could be unstoppable.