By: Bill Spencer — November 29, 2019
Small-Cap Saturday - Here's 2 Ways to Play the Latest Small-Cap Surge
Hard to believe... but another holiday season is underway.
And if the holiday-shortened week that just passed is anything to go by... Santa Claus got here early this year.
(By the way, I haven't forgotten that I promised to tell you all about my trip to Denver... where I was invited to meet with the CEO of Nvidia (NVDA). I'm putting together a briefing about some amazing technologies in the pipeline. You'll get to hear about it all very soon.)
For now, let's look at the market...
For the 26th time in 2019 the market hit an all-time high.
And for the eighth week in a row the Dow Jones (up +0.63%), the S&P 500 (up +0.98%) and the Nasdaq Composite (up +1.70%) all closed higher on the week.
For us though, the real story is the performance of small-cap stocks.
The S&P 600 (an index that tracks small-caps) gained +1.19% this week.
The Russell 2000 did even better. The small-cap benchmark was up +2.23% -- beating the S&P more than two times over... and beating the Dow more than three times over.
What's more, when it hit 1,623.99 on Monday, the Russell put in its highest level since October 1st of last year.
Now, small-caps have always been a great place to find exceptional long-term returns.
After all, a $200 million firm like Workhorse Group (WKHS) can triple or quadruple in size in no time. You'll never see that happen with an Amazon (AMZN) or Microsoft (MSFT).
Also, small-caps are where you'd look to find companies that are prime acquisition candidates.
As I said recently, I recommended a small-cap electronics firm to members of my new premium trading service. The company is primed to benefit from the already-mushrooming 5G Wireless revolution.
The very day I made the recommendation the company announced its intention to be acquired. Plus, I think we may see a bidding war taking shape around this company.
But here's what I think is the main reason we're starting to see small-caps outperform the way they did after the 2016 election.
Many small-cap firms (and startups) are focused on transformative technologies. I mean high-growth industries like 5G and Cybersecurity.
And as you know if you're a regular "Small Cap Saturday" reader, technology has been on a tear.
A couple of weeks ago I showed you this image...
That shows how technology (the red line) has performed versus the three major market averages since the start of 2019.
It's no contest. Technology is by far where investors want to put their capital right now (and for the foreseeable future).
In a moment I'll show you a great way to gain exposure to technology.
But first I want to show you how technology looks when viewed through the lens of the "internal" market.
Here's a Bullish Percent Index (BPI) chart for the Russell 2000, which is one of our proxies for the small-cap universe. As you can see, the chart is in a column of X's and on a point-and-figure "buy" signal.
If you're unfamiliar with BPI charts (or with Point-and-Figure charting) don't worry. They're not just powerful indicators... they're also easy to understand.
The BPI shows us at a glance the percentage of stocks in the Russell 2000 that are currently on buy signals.
For a stock to go on a "buy" signal, it has to break above key technical resistance levels. It takes a lot of buying for that to happen -- at the kind of buying we only see when large institutions are pouring into a stock.
When the chart is in an X column (like you see at the far right of the image above), the Russell 2000 is strong in the short term. That means small-caps as an investment are strong in the short-term.
When the current column of X's is higher than the previous column of X's... it means that more stocks are participating in the current move higher than participated in the previous one.
That tells us that small-caps are strong over the long-term (and getting stronger).
We see the same set up when we look at the S&P 600.
Like with the Russell 2000, this small-cap index is strong in the short-term and the longer-term.
An excellent way to play the surging tech market is with the Invesco S&P SmallCap Information Technology ETF (NasdaqGM:PSCT).
This ETF tracks the S&P SmallCap 600 Capped Information Technology Index -- companies that providing information technology-related products and services, such as computer hardware and software, semiconductors, and Internet and other electronics and communication technologies.
Holdings include Sanmina Corp. (SANM)... LivePerson (LPSN)... and Cabot Microelectronics (CCMP).
On November 7th the fund made an all-time high at $94.66 before pulling back slightly (-4.0%)... and then heading higher on heavy volume (blue arrows).
It now stands about 1.5% below that all-time high, and I'd look for it to gain double-digits early in Q1 2020.
And just to mix things up a bit (and because I'm in a holiday mood...)
Here's A Bonus Play on Technology
Investors who would rather play the larger-capitalized tech companies can look toward the First Trust NASDAQ-100-Technology Sector Index Fund (QTEC).
This ETF tracks the performance of stocks in the Nasdaq 100 that are considered to be "tech stocks".
QTEC normally invests more than 90% of its total assets in common stocks that make up the Technology Index. Holdings include Autodesk (ADSK), Intel (INTC) Apple (AAPL) and Advanced Micro Devices (AMD).
This ETF has doubled over the past three years...
... and is up 46% since the December 2018 correction low.
I'm looking for QTEC to gain 25% to 35% during the first quarter of 2020.
Thanks for reading, and I'll talk to you real soon!