Is it Time for Small Caps to Lead?

US Small cap stocks (IWM) have been underperforming their bigger brethren (SP500) for more than a year, lagging by more than 15% over this period. Looking at the ratio chart (middle pane) of US small cap stocks to US large caps below, you can see we are at a potential inflection area. When the line is rising, small caps are outperforming and when falling they underperform. Over the past 15+ years each time the ratio reached this level, small cap stocks bottomed and went on to outperform. Additionally, you should also notice in the bottom pane of IWM price, each touch of that level resulted in a very significant, long run higher for the index. When combined with the positive RSI momentum (top pane), signaling a potential upcoming trend reversal, small cap stocks are back on the watch list.

Currently clients have zero exposure to the small cap sector since there has been no reason to own them due to their underperformance. But, when looking at the weight of the evidence if we get a trend reversal in the ratio, a breakout of the current consolidation on larger (institutional) buying, it seems like the right time to be adding a starter position into the index.

CRISPeR

If you don’t know about CRISPR technology and you have a vivid imagination of what could be, I would recommend you spend a little time doing a quick search. It is so exciting to read about new medical technology like this as it holds the potential to solve many human medical problems. But it also comes with ethical questions which I will avoid tackling (like politics) here. Gonna just keep it simple and focused on opportunities to make money.

With client investment capital, I prefer to avoid highly volatile (boom/bust type) single stock exposure due to the desire to avoid large losses. On stocks like these, historically the only way to make money is to actively trade them. Even doing that provides no guarantee. Individual biotech stocks like CRISPR therapeutics, symbol CRSP, fit that bill to a tee. As you can see in the chart below, from the early 2018 base breakout, the stock rose more than 200% well exceeding its target (T1) in just 5 short months …. BOOM. Soon thereafter, huge institutional selling started the waterfall decline as it fell almost 70% (peak to trough), giving back all its gains, in 7 months …. BUST.

The current setup and recent breakout look awfully familiar, doesn’t it? (look left)  …. 1) A breakout from a long base 2) institutional accumulation and 3) strongly rising prices. All 3 things investors would like to see before committing investment capital. The upside target from the breakout pattern at T1 points to a 45% increase in price, with 25% more to go before its met. If the market were to continue its bullish trend into the end of the year, I would expect CRSP to exceed that target like it did last time and retest all-time highs, some 50% north of here. For those with high risk tolerance and well honed game plan when dealing with highly volatile stocks, CRSP looks as good an opportunity as I have seen of late..

It’s Hip to be Square

For those that don’t know, Square (SQ) allows merchants to accept mobile credit card payments via a dongle that can be inserted into the port of a phone. When they entered into the payments space, square had the potential to be a disruptor type of business, supplanting Visa and MC as the go to platform for mobile payments. They continue to be a leader and a reason to own the stock.

I like this company and the current leadership position it holds. As such, it is worthy of investment capital, but at the right price and place. As you can see in the chart below, after peaking in September of last year, its price has bounced around and really done nothing other than consolidate sideways awaiting institutional buyers (or sellers) to take the reins and determine its next move. If you have been waiting for an opportunity to enter this stock, yesterday everything you want to see as a buyer (or share owner) happened. Price broke out of a short term (3-month) base making a new, higher high. It did this on significant volume (more than 4x normal) letting us know some bigger players are stepping forth. The fact it is breaking out from a symmetrical, well formed reversal pattern seals the deal.

The upside target for the inverse head and shoulders reversal pattern is up at T1, some ~25% above its breakout point. If the market cooperates and continues to push higher for the balance of the year, it would not surprise me this goes well beyond T1 and on to make new, all-time highs. Like all investments, it comes with risk and having an exit strategy is critical. Clearly, a break back down below the blue horizontal neckline and down to the pattern’s right shoulder would invalidate the pattern and let me know my analysis was wrong (and time to exit).

While its hip to be square, it’s even hipper to be healthy. Get well Huey! May we have the chance to hear you sing again

In Case You Missed Out

In case investors missed out on the compelling [sic] recent Swiss government bond issue, I am here to lay calm to your FOMO (fear of missing out). It’s baaack. As pointed out by Charlie Bilello … $10,000 invested today for 30 years in the new Swiss government bonds will “grow” to $9,856 at maturity 2049. (note: assumes interest rates reinvested at @ current 30-yr rate of -0.05%).

This path (negative interest rates) most of Europe has embarked upon will eventually end very badly and why i continue to avoid that region of the world with client investment capital.

Record Equity Outflows - Caution Flag?

On the surface it seems the headline should be negative for stock prices when the amount of money flowing out of equity mutual funds and ETFs has reached a record. But, as you can see below, when outflows have reached these levels in the past (bottom pane), it has been followed by a strong upward, sustainable trend in US stock prices (top pane) soon thereafter.

While there are no guarantees equity outflows won’t continue, it looks as if we may be setting up for a further push higher for US stocks.