Why I am bullish on small caps!

Relative Strength or fake strength?

Why I am bullish on small caps!

1)     Cross Asset Volatility not trending up

2)     Small Cap Quality, Value, Momentum, Industry Momentum Reference System printing ATHs daily

3)     My Port printing ATHs almost daily since the 21. September low

4)     CANSLIM Leaders lead (NET, APPS, OPEN, UPST, AFRM)

5)     Oil, Gas, Uranium (BCI —> all Comm. close to ATH)

6)     Interest Rates Trending up (Market: I want growth now, not in 3 Years!)

7)     High Amount of Buybacks

8)     Small Cap Earnings better then Big Cap Earnings

9)     Cyc Earnings of small caps getting up estimates revision by the day

10)  Value historically lowest valuation spread to growth since 2003

11)  Russel outperforming

12)  Only 14 out of 40 Countries have a monthly sell signal

13)  Fed: they still print money and interest rates are extremely low

14)  ESG Policies —> inflationary!

15)  Everybody is scared to hell

16)  Strategically possible (I am not betting on that since I am a trader and not an investor, just ice on the cake) secular shift to small caps and value (valuation spread between value and growth has not been better since 2003).

Negative

1)     Strong Dollar (at the brink of breaking out or breaking down!)

2)     Big Caps not leading

3)     Big Cap Tech not leading (besides NFLX and mid cap CANSLIM Names)

4)     Big Cap Earnings growth ROC is negative, Outlooks mostly disappoint

5)     FED: ROC —> hawkish

6)     Dept Ceiling

What I am seeing in the big CAP Growth space is, that valuations seem to matter, not surprising with rising interest rates. So, you can only be in names in this space that had a most recent EPS estimate upswing / outlook (for example Netflix) or stuff that is not too heavy on valuations (ORCL) etc...

Stuff like Square or Peloton are now old, old household names, and the market tries to find out what are the new growth stories (like UPST).

FB (though I think it’s a long term (long term!) buy here, same with Googl and Msft!) is the new Proctor and Gamble. A solid long-term investment, but not exiting. But Facebook and Co dominate the QQQ and the SPY.

So, we might be in a market where those names cannot lift the indexes anymore (for now) for the big cap indexes to be able to lead. SPY has much less short term duration stuff then 10 Years ago!

So yes, there might be another leg down, we might see a 10-12% DD from the highs. If that is the case and my small cap reference system hold + vol not trending up and nice vol premiums, that would be the time to go all in for me and leverage again up to 130%.

Or we grind up from here.

Or in the next leg down vol trends, we have no vol premiums and my small cap show weakness, Cyc’s really weak. Well then, I will be out of the market in no time.

Or we get a melt up:

Let’s just say we get the Dept Ceiling from the table, let’s just say we get OPEX behind us, let’s just say Covid cases drop further, let’s just say the FED comes with a plan they will be not buying bonds anymore next June 2022 (= clarity). Those are bricks in the wall of worry, and they are priced into the market (while there is a ton of strength under the hood).

The (probable, anything can happen!) worst that can happen to me is a 10% DD, the (still probable) best that can happen is another 20-30 % performance (via quality small caps) on to my YTD Performance of 54%. So, the market is going to decide if I have a still o.k. year or a super great year.

I take the bet and stay long quality small caps until the tape changes.

Happy trading!