Small-cap stocks have been on fire so far this January, lifting the Russell 2000 index more than 7%. Oversold technical readings at deep corrective lows have generated most of these bounces, raising the odds that aggressive sellers will return in force in the coming weeks. However, a handful of these lesser-known stocks are now trading at or near new highs, ignoring headwinds that dropped the Russell 2000 nearly 12% in 2018.

Common sense dictates that these resilient issues will continue to outperform in the coming months despite 2019 challenges, offering steady returns for battered portfolios. Just keep in mind that we've entered the most positive time of year for small caps in terms of seasonality, with that technical advantage coming off the books in the second quarter. This tells us to stick with plays offering the strongest upside potential and greatest safety.

Technical chart showing the share price performance of American Superconductor Corporation (AMSC)
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American Superconductor Corporation (AMSC) builds turbine systems for the wind power industry. The Massachusetts-based small cap struggled after topping out at a split-adjusted all-time high near $500 in 2008, entering a steep downtrend that forced the company to issue a 1-for-10 reverse stock split in March 2015. A bounce near $3.25 later that year got tested and broken in 2017, dumping the stock to an all-time low in December 2017.

A recovery wave reached the 2016 high at $12.50 in December 2018, yielding sideways action that is completing a cup and handle pattern. A breakout above the December high will also mount tough resistance at the declining 50-month exponential moving average (EMA), raising the odds for continued upside into resistance at the 2014 high near $27. That would generate an impressive triple-digit return in a tough market that has resisted many traditional trading and investment strategies.

Technical chart showing the share price performance of Fabrinet (FN)
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Fabrinet (FN) manufactures and distributes optical equipment for North American, Asian and European markets through its Cayman Islands domicile. The stock broke out above the 2011 high at $33 in May 2016, entering an uptrend that ran out of steam near $50 in February 2017. Buyers returned after the stock sold off to a 52-week low in the mid-$20s, while the subsequent uptick completed a round trip into 2016 resistance in September 2018.

The stock broke out to a new high in November, stalled immediately at $54.70 and dropped into a rectangular consolidation, ahead of last week's rally to an all-time high at $57.01. It's now testing new support and should turn higher once again, heading for the next upside target in the low $60s. This progressive pattern bodes well for the first half of 2019, with committed buyers now in full control.

Technical chart showing the share price performance of Dorman Products, Inc. (DORM)
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Dorman Products, Inc. (DORM) serves the automobile aftermarket through its Pennsylvania headquarters. A 2016 uptrend continued into May 2017, lifting the stock to a new high in the upper $80s. It lost ground through year end and into May 2018, bottoming out at $56.36, ahead of a recovery wave that completed a round trip into the prior high in November. A pullback into December tested the 50-day EMA twice, ahead of renewed buying interest that yielded a secondary breakout on Jan. 7.

This price action confirms the larger-scale breakout, opening the door to a trend advance that could gather steam in the coming months. The timing is perfect because the trade war has undermined new car sales, encouraging higher sales of used cars, which require spare parts. Technically speaking, the depth of the 2017 correction now predicts a healthy measured move target near $120, nearly 30% above this morning's opening price.

The Bottom Line

The January effect is lifting the small-cap universe, but most of the upticks have started from multi-month or multi-year lows. However, a small basket of issues is trading at or near new highs, setting off bullish divergences that predict superior returns in the coming months.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.