Market Still Serving Up Surprises

It was encouraging to see the market get off its knees this week. But it’s still losing the fight if we’re measuring performance year-to-date—or since the beginning of 2015 for that matter. The chart of the S&P 500 below shows what I mean (blue and green lines are 50- and 200-day moving averages, respectively).

Small caps have had an even tougher time, and are down over the last two years.

But nobody wants to sit at the bar with a guy whose glass is half empty. And the lack of performance in small caps is in no way abnormal—small caps tend to get hit harder when the going gets tough. But they also tend to do better when the market is rising. That’s why I think there’s so much upside potential with small caps if this market can mount a recovery.

The last week was a good start, as this table of small cap sector performance shows. Small outperformed large in most growth sectors, only lagging in financials, materials, industrials and utilities.

At the end of the day, it all evened out though, with both the small and large cap indexes up by 5%. Value outperformed growth in both. Biotech finally put in a decent showing, rising by 6.3%, and junior gold miners had another good week, even after a mid-week pullback. Oil exploded higher, rising almost 20%.

As we head toward the weekend, the backdrop has definitely improved. But we need to see if the bears can be kept at bay. I’d like to see more days like yesterday, where the market was down, but only slightly, to increase confidence that a bottoming process is in the works. As this chart of YTD sector performance shows, it’s anything but a bull market out there at the moment.

The market is still serving up its fair share of surprises, both to the upside and to the downside. While we’ve experienced a few of both in our portfolio, this week saw three of our stocks gain 30%, 18% and 13%.

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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Shopify (SHOP), which came public in May of last year, is a new leader.

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Loews Corp.

This undervalued stock has strong future earnings growth expectations.

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