The Market Bullies Small Caps

by: David Brown

Last week, the market was very selective with only Large-cap Growth in positive territory -- think Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN), and American Express (NYSE: AXP). All other cap/styles were negative -- and the smaller you were, the more you lost. In fact, this entire month the market has beat up on small-caps with its “the smaller you are, the more you lose” bias.

It was an odd week. Economic indicators were mixed, with the usual villain, the initial jobless claims report, disappointing us once again. To be sure, there was much positive news from reporting companies, but revenue growth was again spotty, although better than last quarter. The disappointers include Boeing (NYSE: BA), Northern Trust (Nasdaq: NTRS), Terex (NYSE: TEX), and USG Corp. (NYSE: USG). Seven more banks failed on Friday, and a rather significant player in the commercial real estate field, CapMark, filed for bankruptcy.

So even though 80% of the reporting companies in the S&P500 beat estimates, the disappointing companies and bank failures dragged the market down. Monday started out with a bang and then went bust well before noon when the dollar made another strong move. The market sold off sharply afterward.

Sectors. Last week within sectors, Information Technology was the only positive sector (again, think Apple and Amazon). Consumer Discretionary sort of broke even, and all other sectors were down more or less 1%.

Looking ahead, our new sector ranking system has Telecom at the top, based on very attractive valuations, followed closely by Health Care and Consumer Staples, which makes us feel that the market is still worried about recession. Energy, Industrials and Consumer Discretionary bring up the bottom, which reinforces our recessionary worries.

Lest I leave you on a negative note, it is important to remember the significant improvement in the quarterly reports so far for Q3, including the major breakout quarters by Apple and Amazon. So in my opinion, we’re at a point where the bulls and bears are locked in a fierce battle that is too close to call. I continue to recommend the prudent buying of bargains, but now, on the strength of these robust Q3 earnings reports, you might consider an aggressive investment or two.

4 Stocks to Consider. This week, I ran a MyStockFinder search looking for small stocks that might be well-positioned to participate in a year-end rally. I started with the Small Wonders (micro-caps) preset search but also included Small Caps, and up-weighted Technicals and Momentum, as well as Group Strength. I also asked for higher beta stocks, i.e., stocks that tend to rise and fall more than the overall market. Here are four stock ideas that look intriguing:

  • KMG Chemicals (Nasdaq: KMGB) - Materials
  • K-V Pharmaceutical (NYSE: KVA) – Healthcare
  • Zhongpin Inc. (Nasdaq: HOGS) – Consumer Staples
  • Famous Dave’s of America (Nasdaq: DAVE) – Consumer Discretionary

Full disclosure: David Brown does not hold any of the stocks mentioned in this week’s “Stocks to Consider.”