The first full trading week of 2026 saw small caps outperform large caps by 340 basis points. Tax-loss selling pressure from December reverses, institutional managers deploy fresh capital into the overlooked corners of the market, and the profitable profitable micro-cap names with clean balance sheets were the first beneficiaries.
January rotation is documented and real. The question is always whether the rotation reflects a durable change in positioning or a temporary technical rebalancing that reverses by February. The data from this specific week -- profitable micro-caps outperforming pre-revenue names within the small-cap universe -- suggests more than purely mechanical rotation. There is a quality preference embedded in the positioning that looks like a continuation of the 2025 theme into 2026.