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By: Bill Spencer — July 27, 2019

Small-Cap Saturday - Why This Will Be "Small-Cap Summer"

Hi everybody...

Thanks for joining me for Small-Cap Saturday.

Bill_TheKeys

If you're one of the few hundred folks who've written in recently -- thanks for that as well.

It's great to know there are so many fans of small-cap stocks out there.  And I promise we'll answer as many of you as possible.

As a loud and proud champion of small-caps, I feel moved to "clap back" at some bad press they've been getting.

Maybe you've seen the articles ("Small-Caps Are Down - Here's Why" or "The Case Against Small-Caps")... harping on the fact that small-caps are lagging large-caps and mega-caps this year.  Maybe you're wondering, "Are small-caps a bad bet right now"?

If that's going through your mind... Relax.  Here's why this'll be "Small-Cap Summer".

Some Small-Caps Are Crushing It In 2019

Here's a sample of small-caps picked at random off my proprietary screener.

Each one is up by triple digits since the year began.

(Click any image to enlarge)

SmallCapTripleDigits

True, the Russell 2000 (RUT), the small-cap benchmark, has underperformed the other major market averages.  But there's more to this story.

For one thing, the Russell 2000 is practically neck-and-neck with the Dow.  The small-cap benchmark is up 15.89% in 2019, while the Blue-Chip index is up 16.80% -- a difference of less than a percentage point.

Let me pause to stress the key point here: The Russell 2000 is UP 15.89% so far in 2019.

And when we look at the week-by-week performance of all four indexes we see something none of the small-cap naysayers seems to know (or is willing to say).

Over the past 29 weeks the Russell 2000 has had 18 up weeks.  The Dow has had just 15.  The S&P has had 19 -- one better than the RUT.  Clearly the small-cap sky isn't falling.

The real market thoroughbred is the tech-heavy Nasdaq -- up 24.84% since January 2nd with 20 up weeks.  And that's because Technology has been by far the strongest of the 11 broad market sectors that make up the stock market.

Look again at my random sample of small-cap killers in the image above.  Of those 11 names, 8 are either technology stocks or technology-related.  The same tide lifting the Nasdaq is lifting select small-caps (as much as 864%).

So don't sweat the fact that the Nasdaq is beating the Russell (while also beating the Dow and the S&P).  You have other ways to crush the market besides buying the small-cap benchmark!

Small-caps are riskier than large- and mega-caps.  But as you saw, they can soar five to ten fold, something Google or Amazon won't do.  So here's another reason this will be "Small-Cap Summer".

This "Risk On" Market Won't End Anytime Soon

Show me a major technical indicator that's not screaming we're in a historic bull market... and I'll eat it, with Grey Poupon.  I've been following the markets since Reagan was President... and this bull market is one of the strongest I've ever seen.  And not just because major indexes are breaking new highs.

This is the NYSE Bullish Percent Index (NYSE BPI), showing the percentage of stocks trading on the New York Stock Exchange currently on (point and figure) Buy signals.

NYSE_BPI_Annotated

This chart shows us three things, all of them good.  It's in a column of X's -- a sign of short-term bullish strength.

The chart's on a Buy signal, a sign of longer-term strength.

Finally, the BPI stands at a low reading of 48.65.  The chart won't reach "overbought" (high-risk to bulls) until it hits 70.  Even when it's above 70, sentiment would stay bullish until we start seeing signs of weakness.  So there's lots of room for this "risk on" market to push higher.

It gets better.  Of the six major asset classes, the strongest by far are: U.S. Equities and International Equities.  These are the assets investors pour billions into when they're feeling very confident.

The "risk off" asset classes, the ones investors flee to when the market breaks bad -- Cash and Currencies -- are the two weakest classes.  Investors are avoiding them.

Conclusion?  Bulls are in control, in the short-term and the long.   They are so sure of seeing high returns they're willing take extra risk.

We should see more institutional cash flowing into small-caps as eager bulls chase oversized returns.

More Good News For Small-Caps

Back on June 22nd, we said a mid-term election year (this year) is the strongest for the market.  The next strongest is the election year itself (2020).  So we likely have a great 12 - 18 months ahead of us.

Also, when interest rates are falling, small-caps outperform, because lower rates make it easier for smaller firms to acquire capital and service debt.

I spent eight-plus years with the Federal Reserve, and I'm an avid "Fed follower".  We're all but certain to see the Federal Open Market Committee (FOMC) cut rates by a quarter of a percent (25 basis points) when it meets on July 30 -31.

RateCutHelpsSCs

But what if the U.S. and China can't shake hands on a trade deal?

Well, trade and tariff troubles boost small-caps too!  That's because small-cap stocks have much less exposure to foreign markets.

Finally, President Trump is a huge friend to small businesses.

A recent survey by Wilmington Trust said 59% of small companies approve of how Trump handles issues (such as trade and tariffs) that affect business.  And 53% said Trump’s policies "have had a positive impact on their businesses".

So take it from me, anyone predicting "The Demise of Small-Caps" has been in the sun too long.

Keep Cool and Stay Small,

Big Bill

Bill_TheKeys

 

 

 

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