By: Bill Spencer — November 9, 2020
Small-Cap Monday - The Election's Over - Let's Cash In
Happy Monday my friend...
Absent any last-minute bombshell from the courts, Joe Biden is the President-elect of the United States.
If the election teaches us anything, it's that so-called experts can be the most clueless folks in the room.
On one side we heard breathless predictions of a "blue wave."
On the other, pundits hyperventilated about a "landslide" reelection for Trump.
Through it all, the smartest investors (if you're reading this, I'm talking about you) kept their own counsel while keeping their cool.
I mean, the savviest among us did what we always recommend you do. Watch for what's actually happening -- no predictions allowed, breathless or otherwise.
Then, act accordingly.
That's not a "red" or "blue" strategy. It's just smart.
And while you and I might favor one candidate or one party over another, for one reason or another...
As investors we're mostly agnostic about everything other than price action.
If the market hands us lemons, we make lemonade. If the market's coming up roses, we make... I don't know... "roseade", I guess.
The point is -- we're out to cash in based on a clear picture of the true market.
So how'd the markets fare last week?
(Click any image to enlarge)
Pretty well, I'd say.
The tech-heavy Nasdaq Composite led the way higher, gaining +9.01%.
The S&P 500 and the Dow Jones followed, rising +7.32% and +6.87 respectively.
Small-caps brought up the rear. The Russell 2000 gained "only" +6.87% while the S&P 600 rose +4.39%.
This performance tracks closely with what my colleague Costas Bocelli told you this past Thursday.
In his weekly essay ("Trump or Biden? Here’s Why it Doesn’t Matter for Investors") Costas said, “If Trump wins, it’s positive for the stock market.
And if Biden wins, it’s positive for the stock market.”
Costas outlined three major reasons why that's true, and a big one can be summed up in three words - more fiscal stimulus.
A President Biden still faces a rocky economic landscape. The stock market is likely going to be very volatile for the remainder of 2020 and well into 2021.
Biden should take office on Wednesday, January 20th. "Job One" will almost certainly be the economy. (Exit polls taken during the election showed that 41% of voters ranked "the economy" as their #1 concern.)
So expect another round of relief, including (maybe especially) relief to small businesses and small-cap companies.
Based on last week's performance in the "external" market (the major averages)... it would seem the markets are optimistic, even though at the time nobody knew who'd won the election.
Looking at the "internal market" (sector breadth), we see the same bullishness.
Here's the US Industry Bell Curve from Sector Prophets Pro, our Premium data program.
This image was generated after the market closed on Friday, October 30th.
Just 9 sectors out of 45, or 20%, showed the bulls in control.
Here's what the curve looked like after the close this past Friday, just 14 days later...
Now, 31 sectors are in the hands of the bulls -- 69%.
Our #1 indicator/risk barometer -- the New York Stock Exchange Bullish Percent Index (NYSE BPI) is still in a column of Os.
And it's still on a point-and-figure "Sell signal".
In other words, the market should still be considered weak in the long- and short-term.
See the box and blue arrow? That's the '56' box. If 56% of stocks on the NYSE were on Buy signals on their respective price charts...
Then the BPI would reverse to X's. If you look at the upper left of the chart, you'll see, highlighted, that right now 54.61% of NYSE stocks are on Buy signals.
So if just 1.4% of NYSE stocks, net, (which is just 39 stocks) go on Buy signals, the chart will flip to Xs.
Finally, of the six major asset classes, US Equities leads all others. Investors as a group are calculating that, long term, the best place to store value in is in the US stock market.
Back on July 27th I recommended two excellent ways to play small-cap stocks.
One of them, the iShares Russell 2000 ETF (IWM) gained 8.94% in 15 days.
Let's run that play again.
The IWM tracks the performance of the Russell 2000 index. (The RUT is made up of the smallest 2,000 stocks in the Russell 3000.)
This is a very liquid ETF, trading around 23 million shares daily.
Fully 50% of the fund is made up of three sectors -- Healthcare, Industrials and Technology. Healthcare alone comprises almost a quarter of IWM's holdings (21%).
The fund has retraced almost all of its COVID-related losses, and right now is about 4% away from retracing all of them.
I think we can see this fund move at least that much.
At $163.62 (as of this writing) IWM might be too rich for your blood. A 100-share position will set you back more than $16,000.
Instead, consider buying the IWM May 2021 144 Strike Call option.
With a delta of 75, and 194 days until expiry... this option is ideal for the Stock Replacement Strategy (SRS).
Right now the mean bid/ask spread for this option is $25.75. So you can control 100 shares for just $2,575.
If IWM gains 4.18% within 30 days, and reaches the 100% Fibonacci level on the above price chart (at $170.47, or the highest blue horizontal line), then the option will be worth around $29.67.
That's a gain of almost 18% -- 437% annualized.
If IWM does what it did in July, and gains 8.94% within 15 days, the option will be worth around $36.58. We'll be up 45%, or 1,094% annualized.
Have a great week,
Editor-in-Chief, True Market Insiders