By: Bill Spencer — October 19, 2020
Small-Cap Monday - Can These 5 Stocks Rescue the Market?
Hello and happy Monday.
We're 15 days away from what could be the most consequential Presidential election in U.S. history.
And it's happening just as coronavirus begins staging a comeback.
Already 11 U.S. states are seeing record-high numbers of new cases.
Some neighborhoods not far from my home in Queens have been at least partially locked down once again.
Europe, India and parts of South America are also seeing a spike in new COVID-19 cases.
How all of this will play out is anybody's guess.
The market itself seems to be taking a cautious approach.
The Dow Jones barely budged last week, gaining just +0.06%. The S&P 500 did little better. It was up +0.19%.
(Click any image to enlarge)
Both of our small-cap proxies were down. The Russell 2000 lost -0.24% and the S&P 600 gave back -0.26%.
The tech-heavy Nasdaq Composite was the clear winner, gaining +0.79%. We'll have more to say about technology in a second.
First, I want to talk about that decline in small-caps.
Over the past few weeks we've been talking about a small-cap seasonal pattern.
We said that they outperform in January. And we said that as the year wears on, any small-cap advantage tends to dissipate... and finally evaporate.
It looks like that seasonal affect might be starting to show itself.
Despite this recent softening, small-caps are still outperforming so far in Q4.
And the three small-cap plays we put on as the quarter began are still doing well.
If you're long any of those ETFs, you'll want to think about selling if small caps continue to lag.
Let's look at Technology. I mean "capital T" Technology, as in the broad sector.
If you're a regular True Market Insider reader, you know that, of the 11 major sectors, Tech has been by far the strongest.
Yet this week Tech underperformed the S&P and underperformed seven other sectors.
What's interesting is that, as we expand our time-horizon... Technology performs better and better.
This past week Tech trailed the S&P 500 by -0.47%.
But since Q4 began, Tech trailed only by -0.34%.
If we cast our gaze back to the March market bottom, Tech has outperformed the market by +16.88%.
And when we look back as far a January 3, 2020, that outperformance grows to +24.81%.
Most of the strength in Tech can be attributed to the jaw-dropping performance of the biggest technology stocks.
Here's how the so called FAANG five faired since the market put in a low in mid-March:
This performance chart compares each FAANG stock to the S&P (the red line).
The chart begins at the March market low and runs through last Friday's close.
Until Google began underperforming in early August, all five FAANGs were clearly beating the wider market.
If the past is any guide to the present/future (and in the markets it tends to be)...
We could see a similar scenario to play out if COVID, or political uncertainty sends the market lower again.
It would seem to make sense to look to the FAANG five as a way of retrieving any losses.
But that's easier said than done.
The reason is the FAANG stocks are not cheap. Just the opposite in fact.
Right now 100 shares of Amazon costs $327,271. A similar position in Google will set you back $157,301.
And if you want 100 shares on Netflix, you’ll have to spend $53,079.
That's too rich for most peoples' blood.
Fortunately, by using options, we can control that same 100 shares for just a fraction of the cost.
Using the stock replacement strategy -- an option expiring 180 days out with a delta of between 75 and 80...
A 100-share option contract in Apple can be had for close to $2,500.
A stock replacement call option in Facebook will only set you back $5,420.
You can even take a position in Netflix for "only" $13,000. Not cheap... but still 76% less than buying the stock outright.
The Presidential contest looks to be a "horserace". COVID could flare up more or fizzle meekly.
We might see a serviceable vaccine... or we might not.
The economy might stall are stand tall.
I wouldn't bet too much on any particular outcome. Not the progress of the virus or who will occupy the White House.
The only thing that's certain is that we face uncertainty.
I am certain that Technology will remain strong for the foreseeable future.
I would bet on that.
Have a great week!
Editor-in-Chief, True Market Insiders