A bullish signal for small-caps is flashing for the first time since 2009, indicating more upside ahead, Fundstrat says

• The rally in small-cap stocks is set to continue after a bullish signal flashed for the first time since 2009, Fundstrat says.
• The Dallas Manufacturing Survey shows a sharp spread between current and forward expectations.

The July rally in small-cap stocks is set to continue after a bullish signal flashed for the first time since 2009, according to Fundstrat's Tom Lee.

In a video update to clients on Tuesday, Lee highlighted that the most recent regional Dallas Manufacturing Survey showed that forward expectations are turning positive in a big way.

"What's notable was that current conditions are negative, but forward expectations jumped to +22, and as you can see, that's the highest spread between forward and current since 2009," Lee explained.

Such a sharp spread between current and forward expectations in the Dallas manufacturing survey has historically preceded big moves in small-cap stocks.

"Take a look at what it means for small-cap stocks, because again this is a cyclical survey. That last instance was basically at the very bottom of a huge move in the Russell 2000 in 2009."

"And if you look at the instances where you've had sizable spreads, four of four times that was in front of a pretty big move for small-cap stocks, so I do think that this again is a buy signal confirming why we're in the summer of small-caps," Lee said.

A 10% rally is in the cards for small-cap stocks in the month of August, and an even bigger rally of 40% could unfold by the end of September, Lee has said in recent weeks.

Much of Lee's bullishness on small-cap stocks is based on compelling valuations, falling inflation, and the expectation of interest rate cuts later this year.