Small Caps Get Hammered, but the Pain Should Be Short-Lived

Our stock recommendations got hit hard over the past seven trading days in response to another broad sell-off in the overall U.S. stock market and especially in small-cap stocks.

The Dow Jones Industrial Average declined by 3.2%, the S&P 500 Index fell by 3.7%, the Nasdaq Composite Index dropped by 4.3% and the small-cap Russell 2000 Index declined by 6% from October 16 to October 25.

Fortunately, both the recent trading action in the U.S. stock market and my fundamental economic and company research indicates that stock prices in general, including our recommended stocks, will rebound during the week ahead and then trend higher through at least the end of 2018.

For example, all of the major U.S. stock market indices held above key price-support levels on Thursday and again on Friday morning after declining sharply on Wednesday. Meanwhile, my proprietary Overbought-Oversold Indicator fell to substantial oversold territory during the past three days.

Additionally, the number of stocks that advanced in price versus those that declined in price, and the volume of trading in stocks that moved higher versus the volume of trading in stocks that declined, rose on Thursday after trending lower from September 21 to October 24.

Of utmost importance, my research indicates that economic activity in the U.S. housing market will increase during the coming months after slowing substantially over the past six months.

For example, data released by the National Association of Homebuilders (NAHB) on October 16 indicates that the interests expressed by prospective buyers of new U.S. homes rose during the first half of October to the highest level since February of this year. The National Association of Realtors reported on Thursday that the number of contracts signed by prospective buyers of previously-owned U.S. homes (pending home sales) rose during September after declining during four of the prior five months.

Separately, the U.S. Department of Commerce reported on Thursday that new orders for durable goods (i.e. household appliances, furniture and office equipment) produced at U.S. factories rose during September for the second consecutive month and to the highest level since July 2014, increasing on a seasonally adjusted basis by 7.9% compared to the same month a year ago.

In regard to other significant economic developments, the U.S. Department of Labor reported on October 16 that both the total number of U.S. job openings and the ratio of job openings to the number of Americans employed rose during August, the latest month for which data are available, to the highest level since December 2000 when the department began collecting such data.

Earnings on the rise

The Federal Reserve reported on that same day that industrial production at U.S. factories, mines and utilities continued to trend higher during September, increasing by the biggest year-over-year percentage since December 2010.

Meanwhile, my research indicates that the largest percentage of U.S. companies since the fourth quarter of 2003 reported year-over-year increases in their revenues and earnings for the third quarter of this year.

That same research suggests that a very large percentage of U.S. companies will continue to increases their revenues and earnings for at least the next two quarters. That’s a positive development because the level and direction of stock prices is determined ultimately by the level and direction of their underlying companies’ profits.

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Small-cap winners galore

The big stock market winners share one common attribute: Near the beginning of the ascent of their shares, the companies offer revolutionary products or services, are market leaders in their respective industries, or both. Some big stock market winners that possessed the attributes outlined above are Netflix (NFLX), which we recommended to investors in October 2002; Intuitive Surgical (ISRG), which we bought and recommended in July 2004; (BIDU), which we bought and recommended in August 2006; and MercadoLibre (MELI), which we recommended to investors in October 2010. Get up-to-date small-cap stock picks from David Frazier, editor of Small-Cap Profit Confidential.
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Smarter cryptocurrency investments

The stock market crash of 2008 was the catalyst for his journey into alternatives. And interestingly, it was the impetus behind the creation of Bitcoin and the blockchain technology behind it. Keene Little wasn’t ready to risk his money yet but he was very curious, so he began charting Bitcoin’s technical patterns. What finally convinced him to dip a toe into digital currencies was seeing that they followed familiar price patterns that could be analyzed and successfully acted on. Now he shares those insights with subscribers to the Crypto Wealth Protocol.
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