More Conservative in Sideways Market

There aren’t many safe harbors in which to hide from the current hurricane of market volatility. It’s been a rough start to the year. But all in all, our stocks are holding up quite well. Over the past week, our stocks rose by an average of 4.8%.

This wasn’t how I envisioned the first week of the year. Remember, I called for small caps to rally 15% in 2016! But the year is young, and despite the stormy seas, I think U.S. small caps remain the place to be in 2016. I’m not backing off my bullish call and I will continue to direct your attention toward growth stocks that I believe will work, even in this environment.

That means being somewhat more conservative than I would be in a rampant bull market. This month’s addition has a market cap of $1.5 billion, a share price near 60 and high institutional ownership. It’s far from the most aggressive stock on my watch list. But I believe wholeheartedly in taking what the market gives us, and when the door is open to get into a great small cap, my philosophy is to jump through with both feet. I think this new stock will deliver well above-average gains in the years to come and provide balance as we add much more aggressive growth stocks in the future (on top of the ones we already have).

To make real money, you have to start by avoiding big losses. And you have to outperform the market with the picks you stick with. So far, my last three recommendations are doing just that, on average.

Over the past week, small caps fell by 5.6%, slightly underperforming large caps, which fell by 4.8%. Value held up better than growth in both asset classes, but only fractionally. Small-cap energy was particularly damaged with an 11.8% decline, while small-cap health care, industrials and tech fell by 6.2%, 6.4% and 6.9%, respectively. Small-cap utilities held up the best, falling by only 1.5%, while small-cap financials and consumer staples also outperformed, with declines of 4.4% and 4.0%, respectively.   

That’s where we’ve been. Where are we going? The small-cap trend is pointing decidedly sideways, and right now we’re at a critical juncture. The S&P 600 Small Cap index is at a support zone and we want to see this hold. I think it will, and today’s market looks like it will start off strong. I think this is a buying opportunity. If the market turns south by the end of the day, I’d interpret that as a bearish signal for next week.

Bottom line: I recommend initiating and/or adding to positions on this weakness, but saving some powder should the market fall. I always advise averaging into positions.

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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