By: Bill Spencer — October 5, 2020
Small-Cap Monday - Who's Up for "Round Two" of Tech Profits?
Hello friend, and Happy Monday to you. Thanks for stopping by.
I hope you had a great weekend.
As of this writing, President Trump continues his stay at Walter Reed National Military Center, where he's being treated for coronavirus.
Our thoughts and prayers are with the President and First Lady. And we wish for a speedy recovery for all who are infected.
I'm typing this at my kitchen table in Queens, NY. And I'm happy to say I'm having trouble concentrating.
Well, my home is in the path of LaGuardia airport.
For months following the coronavirus lockdown, it was quiet. No planes.
Then the re-opening began. There were just a few planes...
Now? Every two minutes, another jet roars overhead.
This tells me that air travel is taking off.
This is welcome news indeed. Even if it means I have to move to my living room if I want to get any work done.
If folks are traveling more, it bodes well for the economy.
The recent jobs report also showed some encouraging signs.
On Friday, the U.S. Bureau of Labor Statistics said that non-farm employment rose by 661,000 in September. Unemployment fell to 7.9%.
The Bureau added: "In September, notable job gains occurred in leisure and hospitality, in retail trade, in health care and social assistance, and in professional and business services."
The market liked what it heard.
All five major market averages posted gains last week.
(Click any image to enlarge)
Small caps won the week. The S&P 600 gained almost +5.00% and the Russell 2000 gained +4.36%.
The Dow Jones rose +1.87% while the S&P 500 gained +1.51%.
The tech-heavy Nasdaq Composite brought up the rear, rising +1.47%.
We see that same small-cap strength when we look at how the market has fared so far in October.
Nasdaq and S&P weakness is due to a continued selloff in the giant technology names. The Apples and Amazons of the world.
Our primary indicator, the New York Stock Exchange Bullish Percent Index (NYSE BPI) is still on a sell signal. So the market should be considered weak over the longer term as well as the short.
But the NYSE %30-Week, which tends to move ahead of the NYSE BPI, just flipped from a column of Os to a column of Xs.
We'll see if the BPI follows suit. Certainly if the President leaves Walter Reed and returns to the White House, we should expect the market to react positively.
Looking deeper, we see that the market has stopped "bleeding internally".
Here's a snapshot of all 45 market sectors. (This image is courtesy of Sector Prophets Pro.)
The blue boxes show sectors where the bulls are in control. The red boxes are sectors where bears are in control.
As of Friday's close, bulls control 15 sectors -- 33%.
Last week at this time, the bulls controlled just one sector.
Over the past week, Technology was the second worst-performing broad sector. It declined -0.92%. Only the beaten-down Energy sector (down -5.02%) fared worse.
That said, over the long term, Technology is still the strongest area of the market.
The lockdown boosted a number of industries, such as Internet companies.
As the world adjusts to a "stay at home" economy, demand for software, and for services like Zoom and Google Meet, grows stronger.
The Internet sector is one sector still under the control of the bears.
As you can see, its sector BPI chart is in a column of Xs and it is on a point-and figure "Sell" signal.
The sector's %30-Week chart (which, like the NYSE %30-Week, tends to lead the BPI) just flipped into a column of Xs.
If the chart fills one more 'X' box, it will go on a Buy signal -- and it would be more likely that the sector BPI would follow.
The sector is already very strong versus the wider market.
Its Relative Strength (RS) chart shows a skyscraper column of Xs.
As mentioned earlier, when the world went into quarantine, the online areas of the economy came to the forefront and gained strength.
The economy is (so far) improving. But I think we'll see the movement toward home-working and home-schooling continue.
If you're a somewhat aggressive investor, the Internet sector is a good place to look for attractive opportunities.
I mention "aggressive" because, as you just saw, the sector is technically still weak. But a leading indicator (the %30-Week) is strong and could soon grow stronger.
Before taking a bullish position in the Internet sector, you might want to wait for the sector BPI to flip to Xs.
If you did want to gain exposure to this part of the market now, while placing a bet on continued small-cap strength ...
... consider the Invesco S&P SmallCap Information Technology ETF (PSCT).
This ETF tracks the S&P SmallCap 600 Capped Information Technology Index -- companies that provide information technology-related products and services. Think of things such as: computer hardware and software, semiconductors, Internet, and other electronics and communication technologies.
PSCT holdings include Sanmina Corp. (SANM)... LivePerson (LPSN)... and Cabot Microelectronics (CCMP).
If you've been with me for a while, this ETF might seem familiar.
That's because we've already made money with PSCT.
Back on November 29, we got into PSCT when it was trading at $92.37. By January 19 (just as coronavirus was rearing its ugly head), the ETF was at $100.79.
So if you bought in November, you got to realize a 9.12% return in 49 days. That's an annualized return of almost 68%.
Right now, PSCT is at $87.52. So it has yet to retrace all of its pre-COVID level.
The ETF doesn't trade options, so this will be a straight purchase of shares in the fund.
Have a great week,
Editor-in-Chief, True Market Insiders