IT Stocks Looking Good

A few things are working for us, but not everything is going our way. The broad market is supportive, and with yesterday’s push, the S&P 500 has distanced itself from its 50-day moving average (DMA) and is looking to tackle its 200-DMA, which sits a mere eight points overhead. The move higher has been slightly more muted for small caps, but the story line is much the same—things are firming up. Small caps also sit above their 50-DMA and below their 200-DMA. So far, so good.

My October recommendation remains strong, and is up roughly 15% since early October. In general, our significant exposure to information tech (IT) is a plus. And I expect continued strength based on stellar results from large-cap IT yesterday, including Microsoft (MSFT), Alphabet (GOOGL) and Amazon (AMZN). While small-cap IT drifted 1% lower over the past week, it’s up over 8% since the August 24 low. Within IT, the semiconductor sub-sector, in which we have four stocks, is catching fire. The one-year chart of the iShares Semiconductor ETF (SOXX) tells all there is to tell. With a little luck, we’ll see some follow-through in both the index and our semiconductor stocks. Because of the strength, I’m upgrading one semiconductor stock from hold to buy today.

Unfortunately, there’s no such support for our biotech stocks. The healthcare sector remains extremely weak, even bucking the trend and falling yesterday as the broad market rallied nearly 1.7%. Small-cap health care is down 3.6% over the past week and down 5.3% since the August 24 low. It doesn’t help when a stock like Valeant (VRX) gets crushed because of a bearish short-seller report. With four biotech stocks in our portfolio we have a lot of exposure, and the worst biotech correction in seven years is taking its toll. The iShares Biotech ETF (IBB) has fallen 5.8% since the August 24 market bottom.

Biotech has been such a strong performer for so many years that it’s not entirely surprising to see the current weakness. That said, I expect the biotech sector to firm up if the broad market continues to recover. If it does, this pullback would likely represent an epic buying opportunity. But of course, if the sector doesn’t firm up, the losses will continue to accumulate. This week, we’ll sit pat with our biotech stocks. But I’m watching the sector closely, and will be forced to incrementally trim exposure if we don’t see some improvement relatively soon. The sector has been trying to establish a choppy base in October.

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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