Small-Cap Outlook is Improving

 
The outlook for stocks has improved considerably over the past couple of weeks, pushing large-cap and small-cap indexes back above their 50-day moving averages. Earnings results are likely to determine whether U.S. stocks end the year above or below where they are now. Rather than predict, we’ll simply follow the results and take our cues from the market.

I believe there are many opportunities given the breadth of the market’s decline in August. However, my plan is to tread carefully and focus on high-quality names when considering new additions to our portfolio. There is a rotation going on with many previous market leaders now in a downtrend. That said, the reasons appear to be stock-specific, so focusing on the growth prospects of each opportunity is essential.

Small caps cooled off from last week’s 6.2% rally and as of yesterday’s close are down a modest 0.2% for the week. Large caps have gained 0.5%. Last week’s strongest sectors, energy and materials, have pulled back by 4.1% and 0.4%, respectively. And the closely watched health-care sector, which remains below its 50-day and 200-day moving averages, is up 2.1%. Given the significant exposure to biotech and pharmaceuticals in our portfolio, the next trend in health care stocks will likely determine if many of these stocks remain in the portfolio. I’m watching the health care sector closely. Information tech continues to deliver market-beating returns on an industry-wide basis, and rose by 0.6% over the past week.

In this week’s update, I discuss a couple of recent conferences, some new patent awards and two new board appointees. We have one stock on the verge of moving from hold to buy, and two that have been downgraded to hold.

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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