By Doug Busch

The odds of a rate cut are rising -- and that should give the Dow Jones Industrial Average, small-caps, and other economically sensitive stocks a boost.

Last Friday's market fireworks following Chair Powell's Jackson Hole remarks revealed an unexpected standout. While the S&P 500 managed only a modest 0.3% gain last week, and the Nasdaq Composite slipped 0.6%, the small-cap Russell 2000 surged more than 3%, a decisive display of relative strength. Part of that move reflects relief from a cooling 10-year yield, but more telling is what it says about sentiment: Investors appear increasingly comfortable embracing risk.

The technical setup for small-caps looks appealing. The iShares Russell 2000 exchange-traded fund, which has fallen 0.4% to $233.98 on Monday, broke through "a double-bottom pivot" -- the level that needed to be hit for the bullish pattern to be triggered -- at $230.80, and this is an area where follow-through matters. Historically, the best breakouts work fast; hesitation has often spelled trouble. During the week ending Nov. 5, 2021, the index gained 6% in a bull-flag breakout, only to reverse sharply, sliding in 20 of the next 28 weeks following the bearish evening star formation that followed two weeks later. Additionally, the rare " doji candle," which often signals a reversal of direction that appeared in late November 2024, signaling timely opportunities for investors to pare risk.

Last week's move also came on the back of strong breadth -- when many stocks are rising along with the index. Technology has carried the market for much of the year and still looks healthy, but the sector is due for a prudent pause. That opens the door for rotation into more value-oriented areas. The Dow Jones Industrial Average may fit the bill. Its strength is less about leadership and more about participation, a sign that the rally may be drawing in a broader group of stocks. While today's Dow isn't the deeply value-driven benchmark of decades past, it certainly reflects a less tech-heavy section of the market and the price action is showing fresh vigor.

On the one-year daily chart dating back to last November, last week's breakout above a bullish inverse head-and-shoulders formation is hard to ignore. The index has been capped repeatedly at the 45,000 level for nearly 10 months, but Friday's close finally pushed it through. If the pattern holds, the Dow could be set on a path toward 52,000 by late 2026, despite falling 0.4% to 45,451.38 in early trading Monday.

If the Dow's resurgence is taking on a more cyclical tone, Caterpillar is a solid stock to watch. As one of the priciest components in the price--weighted index, only Goldman Sachs exerts more influence on the benchmark, and technically, Caterpillar looks poised to deliver.

The farm- and heavy-machinery giant is up 20% year to date, and round-number resistance has been a defining theme. Over the past year, Caterpillar stock, which was off 0.6% at $433 on Monday, was firmly rejected at $400 on four separate occasions. That barrier finally gave way in early July, and last week's successful retest turned what had been stubborn resistance into newfound support. Adding to the momentum, shares pushed through a bull flag trigger at $420, setting up the potential for a run toward $500 in the first quarter of 2026.

With lower rates in focus, home builders remain prime beneficiaries. The iShares U.S. Home Construction ETF broke decisively above a cup-with-handle pattern last Friday. Recent technical signals are broadly positive, and we alluded to the group's strength when discussing DR Horton .

For those seeking value beyond pure-play builders, Simpson Manufacturing, which makes building materials, is a name to watch. Though the stock has declined 0.7% to $195.65 on Monday, shares are up 18% in 2025, and the stock is approaching a key double-bottom trigger at $197.92 in a base that began in early 2024. A breakout above this level could drive momentum toward the $260 area by mid-2026. With the housing tailwind strong and risk appetites rising, both the core builders and strategic peripherals offer compelling setups for the months ahead.

For investors looking beyond tech, a rate cut could be the gift that keeps on giving.

Write to Doug Busch at douglas.busch@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

August 25, 2025 10:57 ET (14:57 GMT)

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