Imagine, for a moment, that the stock market is like the ocean. You have waves and the factors that cause them to swell and break, like wind, the tides, or the weather. And while the ocean might seem at rest and calming to watch, it’s never still.
There is always something happening underneath the surface, and the deeper you dive, the more you see. Dolphins… sharks (or shorts, in our case!)… fish… You get the idea.
The stock market is the same way. It has its waves that cause stocks to rise and fall. Last week the stock market surged, as we talked about, but that rally was a mean reversion “crap” rally. So, it was low-quality stocks creating those waves.
Now that we know what was riding higher, we’re going to throw on our scuba gear and dive deeper beneath the surface to see what was wrecked – and what’s ready for the next big wave.
A Bloodbath for Momentum Stocks
The waters were relatively still this Monday, as the S&P 500 closed flat and the Dow up just 0.14%. However, it was a bloodbath for growth stocks. Our friends at Bespoke found that Monday was one of the worst days for growth stocks in years.
Many stocks were hit with profit-taking in a relatively nasty rotational correction that punished the “winners” and rewarded the “laggards.” Tech stocks, in particular, were wrecked, as the NASDAQ closed down 0.2%.
Small-Cap Stocks Surging
Now here’s the good news…
Healthy small-cap stocks’ performance, on the other hand, was just stunning. After lagging the S&P 500 for more than a year, the Russell 2000 index rose over 1% three days in a row. From Monday through Wednesday, the Russell 2000 gained 3.4% while the S&P 500 increased just 0.76%.
Here’s what makes this performance even more exciting: According to Bespoke, it also beat the S&P 500 by at least 1% during these three days. There have only been seven other times this has happened over the last 40 years. That’s huge!
This outperformance has served as a nice catalyst for my Breakthrough Stocks, as the Buy List average is about 23%. And I only see more upside ahead. Remember, there are three significant events that should get the stock market firing on all cylinders: The U.S.-China trade negotiations, quarter-end window dressing and the decline in energy prices.
Broader Market Trend Still Points Up
I know it’s been a bit of an odd market recently, with a mean reversion “crap” rally…tech stocks taking a major hit…and small-cap stocks making such a significant turnaround, which ultimately forced the S&P 500 to trade in a narrow range. But the long-term trend for the stock market remains up.
According to the chart below from Bespoke, the stock market is now oversold and should improve over the next month to two years.
When you look at the S&P 500’s 200-day moving average, this is the seventh time its 52-week high and low range fell below 3% in the history of the S&P 500. It is also the third time in the last 10 years that the one-year high and low range of the 200-day moving average has been below 3%.
But here’s where it gets exciting: The six other times the market traded in this manner, forward returns were well above average. As you can see below, three months after this trading range the average gain was 4.6%; at six months the average gain was 6.4%; at one year the average gain was 16%; and at two years the gain was 28.2%.
The bottom line: There is a lot of potential upside ahead! This is why I am so bullish on this market – even on the down days – and continue to recommend that folks are invested before September 16. Remember, the next big buying window won’t be until earnings season gets underway in October.
I don’t want you to miss out on these potential gains, and I expect to lock in plenty in Breakthrough Stocks, as I only recommend the crème de la crème of the small-caps. Out of the 24 stocks on my Buy List, more than half are sitting on positive returns, with two in the triple digits and eight in the double digits.
Clearly, there’s a lot happening below the surface of this stock market, but in the end, there are going to be exciting waves for investors to ride for a long time. So, are you ready to grab your surfboard and ride them, too? I know I sure am, and I encourage you to join me.