Bears Are Firmly in Control

The dismal start to the year continued this week (and looks to resume today) as global markets seemed to throw in the towel. The bears are firmly in control, even though the bulls put on a decent show yesterday. At this point, it’s a guessing game as far as trying to predict the market’s near-term direction. We need to work through this volatility by trying to stick with what works and avoiding what doesn’t. I think we’ll ultimately have a good year—the 8% decline in small caps year-to-date only increases the return potential of newly established positions by year-end, assuming small caps can return to the 2015 highs (I think they can).

But let’s look at what’s going on now since potential doesn’t necessarily translate into reality. A continuation of the decline would risk taking the S&P 500 below the August and September “double dip,” which brought the index to roughly 1868 and 1882, respectively. I thought it was somewhat encouraging that the index turned up at 1890 yesterday, meaning it would have put in a higher low. But we can probably scratch that scenario based on early action today—we’re likely to test the lows heading into the three-day weekend.   

Small caps, as measured by the S&P 600 Small Cap Index, were far less stable this week, plunging through the September 2015 low of 642 to hit a low of 607 on Wednesday. I think there is a lot of spillover hurting the small-cap asset class that’s not necessarily indicative of its potential. There are areas of intense weakness (energy, materials and industrials are the stand out underperformers), which appear to be overpowering the more resilient sectors (healthcare, consumer staples, utilities, tech). A look at sector performance (chart below) from the beginning of 2015 though yesterday’s close gives some perspective on what’s going on out there.

Sector performance doesn’t say a whole lot about individual stocks of course, which is what we’re most interested in. But I think it’s helpful to understand the landscape and for measuring relative performance so we know if our positions are doing better or worse than the broad market. As of yesterday’s close, most of our buy-rated stocks are doing just that.

Lastly, remember to join me next Tuesday, January 19, for my Lunch With The Analyst webinar. I’ll be talking about the promise small-caps hold for the next year—talking sectors, strategy and stocks—and taking questions. If you can’t join us live, if you sign up, we’ll send you a link to the recording. You can sign up for this free event here.

Tyler Laundon is Chief Analyst of Cabot Small-Cap Confidential. To read subscriber reviews of Cabot Small-Cap Confidential, click here.

This is an excerpt from Cabot Small-Cap Confidential, which features little-known stocks with big potential. It offers a limited number of subscribers the opportunity to discover overlooked, low-priced stocks that have the potential to skyrocket. This advisory is best suited to experienced investors who embrace volatility.

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