September has been a good month for stocks thus far as both
small caps and large caps have posted positive gains. Month to
date, the S&P 600 Small Cap Index is up 3.8 percent and the
S&P 500 is up 4.2 percent.
As I said time and time again this summer, I expect the market
to move sideways as businesses, investors, and policymakers attempt
to decipher the mixed messages coming from around the globe. And it
has, continually bumping up against resistance and retreating to
support. Since April 1, both large and small cap stocks are neck
and neck - down around 4.5 percent.
But we've seen pockets of strong performance - including
technology and precious metals - and investors who waded into these
sectors have most likely been able to capitalize on low volume
trading weeks to add strong positions to their portfolio.
***I want to briefly discuss where stocks are relative to where
they've been over the last five years to put today's market in
perspective. The chart below shows the S&P 500 (in blue) and
the S&P 600 Small Cap Index (in red) over a five year time
horizon. Both show support lines established in the summer of 2006
and in 2008 continue to function as resistance for small caps and
large caps alike.
For the S&P 600 we're up against resistance right now around
350, and similarly the S&P 500 has had a hard time breaking
(and staying) above the 1350 area.
You can also see from the chart above and the performance chart
below that both small caps and large caps have hardly returned any
profits over the last five years.
The takeaway message from these charts is: now is not the time
to get greedy. It's easy to let your guard down and pile into
highly speculative, fast trading stocks when the market is rallying
as it did coming off the March 2009 lows.
But we are in a period of market consolidation now as the
economy works through significant challenges. Accordingly, we need
to maintain a cautiously optimistic perspective and stay in stocks
that will continue to perform whether the economy grows, stagnates,
Of course, if stocks push above the resistance lines I've just
discussed, they might just stay there. In either scenario, small
cap investors should continue to pursue high growth companies in
strong industries like technology, energy and precious metals. In
other words - don't adjust you strategy based on the day-to-day
noise in the market. Look for strong industries, invest
accordingly, and only change your plan if you have a fundamental
shift in your investing thesis.
***For the more adventurous, this week may provide some momentum
for a deeply hated sector - housing. Some may wonder how I can
suggest investing in strong sectors in one paragraph, then say to
keep an eye on housing related investments in the next.
My answer is simple - housing is a major drag on the economy. Part
of why stocks are flat over the last 10 years is because of
deflation in the housing sector. But if you believe that stocks
will be higher in one year, you almost have to assume that the
housing market will begin to recover. And if it does, you want to
have at least a little exposure.
Sometimes the risk of investing in a hated sector is far lower
than piling into an overheated one. Of course, it will depend on
your time horizon. But when something is deplored, hated, and being
sold at a deep discount, there are bargains to be had.
The headline today is that homebuilder's confidence is at an
18-month low for the second straight month. This is terrible news
if you're a contractor - or if you were heavily invested in housing
stocks a year ago. But if you are neither, you may want to start
looking for bargains. Especially since fall and winter is typically
a weak time of the year for homebuilding.
Hated, deplored, beaten down, and entering a slow season. Sounds
like a shopping opportunity to me.
I'm not going to go into any specific small cap opportunities in
the housing sector today, but I would like to get your feedback. Do
you have any interest in adding exposure to housing right now? Do
you think this is a foolish move? Or is it a wise strategy for the
patient investor? Let me know. My address is:
***Keep an eye out for housing data to be released this week.
The Department of Commerce releases housing starts and building
permit data for the month of August tomorrow, and existing home
sales are released by the National Association of Realtors on
Thursday. The housing data week wraps up with new home sales data
released by the Department of Commerce on Friday.
I've got a few ideas on how to invest in this hated sector. But
before I open up the discussion, I want to hear what you have to