The Breakout We've Been Waiting For
Small-cap stocks are outperforming... The lifeblood of a bull market... The risks in mega caps... The opportunity in biotech... More signals about a rate cut... Mailbag: On assassinations and the definition of money...
It's the 'lifeblood of a bull market'...
That's how Wall Street veteran Ralph Acampora, who calls himself the "Godfather of Technical Analysis," describes "rotation."
The concise phrase contains powerful insight...
Essentially, the idea of rotation is that money is flowing around the market – among different sectors and styles – but not out of it in a panic or bear market. The leaders and laggards might change, but the "stock market" still moves higher in general.
Rotation might reveal itself in the popular sector of the time falling a little one day, while other "laggards" rise. Or you could see it when one or two major indexes trade sideways and another rises for a few days, or weeks, in a row in a noticeable pattern.
Today, we saw the hallmarks...
Small-cap stocks outperformed substantially for the fourth straight trading day...
If I (Corey McLaughlin) had a nickel for every time I've said small caps have been lagging in the past few years, I might have a dollar or two... Now, the story is changing.
The small-cap Russell 2000 Index was up another 3.4% today – bringing the index's four-day return to roughly 10%. The benchmark S&P 500 Index is nearly flat in the same span. The tech-heavy Nasdaq Composite Index is down about 2%.
Meantime, in the past two days, the Dow Jones Industrial Average is hitting new all-time highs again, and it's up more than 4% since July 9.
It's rotation...
With the prospect of lower interest rates ahead, which would help capital-intensive smaller or speculative businesses, we've been patiently waiting for small caps to start breaking out.
As our Stansberry's Investment Advisory team wrote in this month's edition of our flagship newsletter, the relative valuations of large-cap stocks over small caps recently had reached highs not seen since 2000, which is exactly the time to take the contrarian view...
Our portfolio is also hedged against big market downturns with positions in precious metals stocks and world-class, capital-efficient businesses that should hold up much better than the overall market.
And we want to put new money to work in less risky parts of this bull run... like small caps, for instance. Large-cap stocks have been crushing small-cap stocks recently. And the ratio of large caps to small caps is now at a level not seen since 2000.
That's why we're looking to recommend value-oriented, beaten-down, smaller-cap stocks that are more likely to outperform...
We've talked in the past about the opportunity in small caps, like in biotech stocks that tend to outperform when the likelihood of a Federal Reserve rate cut is afoot. Regular readers know we're likely on our way to that point...
As we've mentioned several times, small caps have been quietly trending higher since October 2023, but this recent string of outperformance is more notable. The Russell 2000 is now just 5% away from an all-time high last reached in late 2021.
If or when that happens, absent a significant sell-off in the S&P 500 or Nasdaq and continued "rotation" instead, all of the major U.S. indexes will likely be trading at or near all-time highs.
There are risks to consider, of course...
Our founder, Porter Stansberry, just wrote to you on Friday with a great analysis and cautioned against being bullish on mega-cap tech stocks right now. As he began...
I believe we are at an important peak in equity prices... that a big decline in stocks is inevitable... and that buying tech stocks here will lead to poor returns for at least a decade.
Porter said we're in the "midst of the greatest financial bubble of all time"...
The mania in tech stocks today far exceeds the 2000 bubble. Going forward, for the next decade or longer, returns on large-cap tech stocks will be well below average. And for investors who pile into tech stocks today, when they are trading at 30 times sales, the results will be catastrophic.
Indeed, buying shares of popular tech names like AI darling Nvidia (NVDA) carries more risk than reward today. Instead, the time to do that would have been years ago... or when shares of the company, or other high-quality names, eventually drop to a more reasonable price.
As Porter shared, insiders at Nvidia have been selling shares at the fastest pace ever, dumping $500 million worth of shares in June alone. He also pointed out several reasons why the S&P 500 is incredibly overvalued today, and said...
There are great times to be a buyer of stocks and there are terrible times to be a buyer of stocks. Right now has all of the hallmarks of a terrible time to be a buyer of most stocks, especially tech stocks.
Porter said he thinks the "top" is in for big-cap tech... advised against buying this current dip... and instead offered several "sensible solutions" for protecting your portfolio from the damage to big-cap stocks that could be ahead.
If you missed Porter's essay, read it here.
One of his ideas was having some exposure to smaller, biotech stocks – which are notoriously sensitive to interest rates.
If the economy weakens – which it has been if you're following the unemployment rate – and the Fed cuts its suggested bank lending rate range, biotech stocks could move substantially higher, and certain ones have been trading for less than the net cash on their balance sheets.
In other words, ridiculously cheap.
Happy hunting...
Dan Ferris and I discussed the opportunity in biotech with Erez Kalir – biotech research analyst at Porter's new boutique advisory, Porter & Co. – a few months ago on an episode of the Stansberry Investor Hour.
You can watch that for free here on YouTube or listen wherever you get your podcasts and hear Erez's blueprint for identifying these stocks.
As I mentioned, you can check out our Investment Advisory for smaller-cap recommendations as well, including fresh advice in this month's issue.
If you're hunting for more small- (and micro-) cap opportunities, we'll also point you to the great work of Stansberry Venture Value editor Bryan Beach and Stansberry Venture Technology editor Dave Lashmet...
Existing subscribers can get caught up right here and here, respectively. Many of Bryan's and Dave's recommendations are still trading below recommended buy-up-to prices. If you're interested, please note their specific allocation suggestions and the risks involved with these smaller, more volatile stocks.
Bryan has a useful list of "selling guideposts," for example, tied to quantitative metrics.
Dave tells his subscribers to diversify across many positions so they're not overexposed to one company and emphasizes position sizing to keep a big loss with any one stock from having an outsized effect on their overall portfolios.
We may already be seeing this shift play out...
We're not making a formal recommendation here, but for illustrative purposes: As the Russell 2000 Index has taken off over the past week or so, the iShares Biotechnology Fund (IBB) is up 10% concurrently, since July 3.
That's the day that, in my view, Federal Reserve Chair Jerome Powell made an "unofficial announcement" about the central bank's intent to lower rates ahead. After all, he said he expected inflation to be in the 2% range a year from now but that rate cuts were on the table... suggesting the inflation "fight" is over.
The rhetoric has only picked up since.
Just yesterday, Powell said plainly that the Fed won't wait until inflation hits 2% to cut rates. In a live, recorded discussion with billionaire David Rubenstein – chairman of the Economic Club of Washington, D.C. (and now owner of the Baltimore Orioles) – Powell referred to staying ahead of the "lag" effects of monetary policy...
The implication of that is that if you wait until inflation gets all the way down to 2%, you've probably waited too long, because the tightening that you're doing – or the level of tightness that you have – is still having effects which will probably drive inflation below 2%.
Instead, he said he wanted to see some more "good inflation data, and lately here we have been getting some of that."
As we wrote last week, not only that, but a "whiff of deflation," in the June consumer price index report, which will likely go a long way toward a Fed policy shift in the months ahead.
The core personal consumption expenditures ("PCE") index – the bank's preferred inflation measure – also showed 0.1% month-over-month growth in May, for example, a "normal" pre-pandemic pace. Headline consumer price index ("CPI") numbers fell by 0.6% in June and grew by a 0.1% pace in May.
If more of the same shows up in the almighty "data" over the next few months, the long-awaited "Fed pivot" will likely finally arrive.
The federal-funds futures market currently puts a 92% probability on a 25-basis-point cut at the Fed's September meeting, though 93% odds of no cut coming out of the Fed's next policy meeting on July 30 and 31.
New 52-week highs (as of 7/15/24): Apple (AAPL), American Express (AXP), Alpha Architect 1-3 Month Box Fund (BOXX), Berkshire Hathaway (BRK-B), Western Asset Emerging Markets Debt Fund (EMD), Diamondback Energy (FANG), GEO Group (GEO), ICON (ICLR), iShares Convertible Bond Fund (ICVT), iShares Core S&P Small-Cap Fund (IJR), iShares Russell 2000 Value Fund (IWN), JPMorgan Chase (JPM), Eli Lilly (LLY), London Stock Exchange Group (LNSTY), Motorola Solutions (MSI), Omega Healthcare Investors (OHI), Planet Fitness (PLNT), Ryder System (R), RadNet (RDNT), Royal Gold (RGLD), Invesco S&P 500 Equal Weight Technology Fund (RSPT), Sprouts Farmers Market (SFM), S&P Global (SPGI), Teradyne (TER), Texas Pacific Land (TPL), United States Lime & Minerals (USLM), ProShares Ultra Financials (UYG), Viper Energy (VNOM), Vanguard S&P 500 Fund (VOO), and Waste Management (WM).
In today's mailbag, feedback on yesterday's edition about the assassination attempt on Donald Trump and the market's reaction to it... plus an answer to a question in yesterday's mail... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"If my memory serves me well, there was an assassination attempt on the life of Andrew Jackson. As I recall, the would be assassin approached Jackson and produced two single-shot pistols... but neither fired. Jackson then proceeded to beat his assailant within an inch of his life with his only means of self-defense, his cane..." – Subscriber Ransom G.
Corey McLaughlin comment: Yes. My label of "survived attempts" yesterday referred to presidents who were wounded in attempts and survived, but I could have included Jackson's name and a long list of other presidents who have been targeted in "unsuccessful" attempts as well.
With Jackson, there were two misfires, as you say, from very close range... Here is an account from the Senate's historical office...
On a cold, wet January day in 1835, an unemployed house painter named Richard Lawrence hid behind a pillar at the entrance to the Capitol Rotunda. He awaited the arrival of an important Capitol visitor – President Andrew Jackson – who was attending a congressional funeral. As the president approached, Lawrence stepped forward, raised a derringer single-shot pistol, took careful aim at Jackson's heart, and fired. The cap exploded, noise and smoke filled the air, but the powder failed to ignite. Misfire!
The aging president was in ill health, forced to lean on a colleague and use a cane, but he remained defiant. As Lawrence pulled a second pistol and again took aim, Jackson charged his assailant with cane held high. Lawrence pulled the trigger. Again, misfire! Quickly, bystanders tackled the would-be assassin to the floor while the president was hustled away.
That was the first known assassination try against a U.S. president, the nation's seventh, about 190 years ago.
As we said yesterday, we've seen many other failed plots since then... My conservative count includes at least a dozen. And only 45 people have served as U.S. president, meaning a relatively high percentage (around 25%) have been assassination targets.
It has been decades since a U.S. president was wounded by one of these attempts, though, the previous being Ronald Reagan in 1981.
"Subscriber Norm R. asked: 'What is money?'
"I think we should listen to famed banker J.P. Morgan for the answer.
"In 1912 when he testified before Congress he was asked: 'But the basis of banking is credit, is it not?'
"To which he replied: 'Not always. That is an evidence of the banking, but it is not the money itself. Money is gold, nothing else.'
"These days we think money is the U.S. Dollar but that is not money, it is currency backed by credit." – Subscriber S.I.
All the best,
Corey McLaughlin
Baltimore, Maryland
July 16, 2024