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By: Bill Spencer — September 7, 2020

Small-Cap Monday - Don't Fear the Reaper

Happy Monday Small-Cap Aficionado!

Today is Labor Day, and I you're enjoying a well-deserved respite from your labors.

I think I'll spend a few hours today catching up on some stand-up comedy specials I've been meaning to watch.

There are 1,000 things I love about my job, but one of the biggest is that my boss, Chris Rowe, shares my love of stand-up comedy.

When I lived in Boca Raton, Florida the biggest perk was that I got to see Chris perform his hilarious standup routines in Miami and Boca and Ft. Lauderdale...

I've done a few standup shows myself, and during the summer of 2013 I performed with a comedy improv group in New York.

So when Chris and I have one of our epic all night conversations, we sometimes spend more time cracking each other up than talking about the markets.

It's a good thing that Chris and I both love to laugh. Because in our industry there's a lot to laugh about -- i.e. the mainstream financial media.

And goodness knows when the markets go crazy, a good laugh is a great way keep your emotional head above water. That always helps guard against irrational decisions.

The selloff we saw late last week was certainly no laughing matter.

On Thursday, September 3 all the major averages fell out of bed. The Dow Jones fell -2.8% on the day while the S&P 500 and the Nasdaq Composite gave back -3.5% and -5.00% respectively.

The small-cap heavy Russell 2000 dropped -3.00% while the S&P 600 fell -2.5%.

This marked the worst single-day selloff since June.

At week's end the  major indices had finished in the red. The tech-heavy Nasdaq Composite bore the brunt of the sudden selloff, falling -3.27%.

(Click any image to enlarge)

The Dow Jones and the S&P 500 fell -1.81% and -2.31 respectively.

There's a silver lining here for readers of "Small-Cap Monday".

On August 24 we took five bearish positions. And right now four of our bearish Put options are up.

We took those bearish positions, not because we were bearish on the market necessarily, but because we were seeing small-caps underperform large-caps...

And because those stocks were all underperforming the market and underperforming their sector peers. Plus, because we bought Put options, our risk was limited.

We never try to predict what the market will do, and we pity anyone who does.

Instead we try to see clearly what's actually happening at the moment and base our moves on history and probability.

Right now the odds say that this latest decline won't last long and that the market will continue higher.

As Chris Rowe pointed out on Friday, the market had been deeply oversold in March. That means that investors who were uncommitted or scared were all shaken out. They're on the sidelines.

Our #1 indicator, the New York Stock Exchange Bullish Percent Index (NYSE BPI) is still in a column of X's, which you see highlighted at the far right, below.

That means the market can be considered strong in the short term.

And the BPI is still on a Buy signal, where it's been since April (the blue arrow). That means the market is strong over the longer term.

There are other signs of strength. As an asset class, US Equities has resumed its perch at the #1 spot. (It had fallen as low as fourth place out of six.)

And when we look at the 11 broad sectors, we see that the market is "risk on" right now.

The strongest major sectors are shown at the left, in green. The weakest are in red at the right.

Right now the riskier Consumer Cyclicals is the strongest sector while the safer Utilities and Consumer Non-Cyclicals are among the weakest.

On top of that, when we look at the #2-ranked asset class -- fixed income -- we see a similar arrangement.

The strongest fixed-income vehicles are the riskier ones -- US Preferred Securities and High-Yield (aka "junk") bonds. The weakest are the safest ones, including Municipal Bonds and US Treasuries.

Bottom line? Investors clearly have an appetite for risk.

Some headline news could also whet their appetite further...

This past Friday the federal government said that the US unemployment rate fell into at the single digits (8.4%) for the first time since March. That's down from 10.2% in July.

And in a development which might turn out to be a bullish game-changer for the economy and the market...

Russia's "Sputnik-V" coronavirus is showing positive results following its first round of trials. The vaccine produced an antibody response in all 76 of the participants it was tested on.

A study published Friday by the Lancet claims that the treatment "led to no serious adverse events". In other words, it appears to be safe, at least so far.

The next step will of course be larger-scale trials complete with control groups and placebos.

None of this means the market faces no headwinds.

Last week the NYSE %30-Week chart flipped to a column of O's.

This internal indicator tends to lead the slower-changing NYSE BPI. So a flip to O's in the %30-Week could foreshadow a flip in the BPI.

Time will tell...

As always, our job will be to see what time has told us, and then to adjust accordingly.

Thanks for reading.

Enjoy your well-deserved holiday,

Bill Spencer

Editor-in-Chief, True Market Insiders

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