Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Small Cap Stocks

While the exact definition of small-cap stocks can vary from brokerage house to brokerage house, small-cap stocks usually have stock market capitalization of less than $1.0 billion, but more than $400 million. Small-cap stocks sometimes see their stock market capitalization eventually exceed $1.0 billion, at which point they become large-cap stocks.

Top 5 Micro-Cap Stocks to Watch in 2014

Top 5 Micro-Cap Stocks to Watch in 2015

 

What the Fear Index Is Telling Us About Stocks Now

By for Profit Confidential

Why This Stock Market Rout Is Here to StayOver the past few months, I warned my readers the stock market had become a risky place to be. While I also suggested euphoria could bring the market higher than most thought possible—to the point of irrationality—the bubble has now burst. Key stock indices are falling and fear among investors is rising quickly.

Please look at the chart below of the Chicago Board Options Exchange (CBOE) Volatility Index (VIX). This index is often referred to as the “fear index” for key stock indices. If this index rises, it means investors fear a market sell-off. If it declines, investors are complacent and not worried about the stock market falling.

Volatility Index Chart

Chart courtesy of www.StockCharts.com

In just the last 18 trading days (between September 19 and October 15), the VIX has jumped 122% and now stands at the highest level since mid-2012. It has also moved way beyond its 50-day and 200-day moving averages, which shows strength and momentum to the upside from a technical perspective.

Sadly, the VIX isn’t the only indicator telling us that investors don’t want to be in the stock market. Below you’ll find the NAAIM Exposure Index chart, a measure of equity exposure of active money managers (the so-called smart money).

NAAM Exposuer Index Chart

Chart courtesy of www.StockCharts.com

Active money managers continue to reduce their exposure to equities as key stock indices fall. On September 2, 82% of their collective portfolios were exposed to the stock market. Now, it’s only 33%. This represents a decline of 60% in their equity market exposure.

On the fundamental front, the stock market is constrained as well. Each day, we are seeing deteriorating economic data … Read More

What the Smart Money Is Doing Now

By for Profit Confidential

Smart MoneyAccording to the Investment Company Institute, assets in institutional money market funds increased $17.19 billion to $1.69 trillion for the week ended on September 24, 2014. This was the biggest weekly increase in these money market funds in the last five months. (Source: Investment Company Institute web site, last accessed October 1, 2014.)

This is critical: when institutional investors sense the risk of a stock market sell-off in key stock indices, they tend to move their assets into highly liquid money market funds.

The sudden rush of institutional money into money market funds correlates with the National Association of Active Investment Mangers (NAAIM) Exposure Index below. It shows a clear decline in the amount of stocks active investment managers are holding in their portfolios.

NAAIM Exposure Index Chart

Chart courtesy of www.StockCharts.com

Since late 2014, we’ve seen investment managers reducing their exposure to key stock indices. While they were fully invested in early 2014, we see investment managers are only 59.76% invested in stocks right now. Is it just an anomaly they are selling stocks when money market funds are seeing an influx of cash? I hardly think so.

Finally, let’s look at small-cap stocks, as they are facing severe scrutiny. Key stock indices like the Russell 2000 that track the performance of small-caps are plunging. The Russell 2000 is now down more than 10% since it made new highs in March of 2014. This small-cap index has now broken down below its long-term uptrend, as illustrated in the chart below.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

(Let’s remember that the trend is your friend—until it’s broken.)

Dear reader, all of this should be nothing new … Read More

Small-Cap vs. Big-Cap: The Real Winners in This Market

By for Profit Confidential

Why I'm Not Giving Up on Small-Cap StocksHealthy second-quarter results from technology and banks are helping to drive buying in stocks. On Tuesday, the S&P 500 traded at an intraday record and is again looking toward 2,000, while the blue-chip DOW is edging toward another record.

While we are hearing about how the S&P 500 will break 2,000 and the DOW will reach 20,000, we are not hearing much about small-cap stocks, which have been under some pressure this year after leading the pack in 2013.

The Russell 2000 is struggling after failing to hold above 1,200 on two occasions; it’s currently down about 0.66% this year and 4.6% from its record.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

I recently read how the failure of the Russell 2000 to follow the broader stock market higher is a red flag that could warn of a pending correction in the stock market.

Now, while small-cap stocks are probably the most vulnerable to selling at this time, I don’t feel that it’s time to simply ignore this high-beta growth group and focus solely on big-cap stocks.

My thinking is that investors are simply dumping some risk from their portfolio after recording strong returns in 2013. It’s not that small-cap stocks are inferior to the S&P 500 companies. In fact, as long as the economy continues to grow, small-cap stocks will fare well.

You just need to have some patience and think longer-term, as some of these small companies will become big companies. Case in point: I highlighted touchscreen technology provider Synaptics Incorporated (NASDAQ/SYNA) in October 2013, when the stock was a small-cap at around $46.00. The stock has since nearly doubled to … Read More

Biotechs, Small-Caps, and IPOs: Making Sense of This Peculiar Stock Market

By for Profit Confidential

This Year's Peculiar Market Short Exuberance RiskThe spot price of oil has been eerily steady for quite some time; this is quite unusual for the world’s most traded commodity.

It’s been a peculiar year in capital markets, and there’s definitely an uncertainty in sentiment, especially in the equity market with no real trend for investors to latch onto. It makes me think that equity investors should be proactive now and take a hard look at their portfolios for investment risk.

Speculative fervor has been reduced and while small-cap stocks, initial public offerings (IPOs), biotechnology stocks, and super-high-valued stocks have taken it on the chin, this is not unreasonable for the longer-run trend in equities.

The Dow Jones Transportation Average just hit another record-high and its long-term chart, while impressive, actually looks kind of scary. The capital gains are tremendous since the March 2009 low, which begs the question as to when it’s going to reverse.

Historically, most of the average’s declines have come in the form of short bursts of downside, peppered by several multiyear periods of non-performance.

The stock market is highly unlikely to break down without a commensurate move in transportation stocks. But there is clearly room for downside in these share prices. Delta Air Lines, Inc. (DAL) has doubled in value since just last September.

Caution. Caution. Caution. If you eliminate the bubble capital gains produced by stocks comprising the S&P 500 index during the late 1990s and their price recovery during the mid-2000s, the long-term chart still reveals an incredible performance. The crash of 1987 now looks like a blip. The 100-year chart of the S&P 500 is featured below:

S&P 500 Large Cap Index Chart

Chart courtesy Read More

How to Profit from These Vulnerable Stocks

By for Profit Confidential

Top Plays for Weak Small-Cap & Tech StocksFolks, there is a technical breakdown on the charts of the small-cap, growth, and technology groups in the stock market. I can’t say I’m surprised, given the major run-up in 2013 and the lack of any significant stock market correction.

The fact that the majority of the high-momentum technology stocks have corrected more than 20% is a red flag that there could be more breakdowns on the charts. (Read “My Simple, Safe Investment Strategy for Playing Risky Stocks.”)

While I’m not saying that a bear stock market is on the horizon, I do suggest that the stock market risk is above-average at this time, and we could see a bigger correction pending.

On May 6, there was a downside break of the Russell 2000 to below its key 200-day moving average (MA) of around 1,114. This could signal additional downside moves. As of that time, the index was down 4.78% in 2014 and 8.56% from its record high. The previous time the index corrected 10% from its high, it was subsequently met with buying support in the stock market. Note the downward-trending channel on the Russell 2000 chart below.

Russell 2000 Small Cap Index Chart

Chart courtesy of www.StockCharts.com

With the break, you could consider adding the iShares Russell 2000 (NYSEArca/IWM) exchange-traded fund (ETF) as a play on a possible bounce in small-cap stocks, especially if the index corrects more than 10%.

Technology also continues to be fragile, with the NASDAQ south of its 50-day MA. Watch for a possible move and testing of the 200-day MA at 3,982. This index has corrected 6.67% from its recent high and looks to be setting up for another … Read More

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