No Profits? No Worries! Your Stock Can Go Parabolic
Not all small-cap indexes are the built the same — and that tells us a lot about this market. Also, I’m not just focused on the banks this week. Another group has my attention too.
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It turns out not all small-cap indexes are created equal. I’m not talking about the difference between the Dow Jones Industrial Average, which is a price-weighted index vs. the S&P 500, which is market-cap weighted.
Nor am I talking about the difference between say the S&P and the equal-weight S&P. Those are about different ways to calculate an index. But when it comes to small-caps, as we discussed last week, there is no need to be a profitable company to be included in the Russell 2000.
It turns out to be included in the S&P SmallCap 600 you must be profitable. Thanks to a very astute reader who pointed out when you look at the chart of the (IWM) , the ETF to be long the Russell 2000 (which we have determined doesn’t even have half the companies in it profitable), relative to the SML (SmallCap 600), you can see that statistic I quoted (from Liz Ann Sonders of Schwab) the other day in chart form.
The months prior to April it just vacillated. Since the April low, it has been a one-way street. And since August, and certainly October, it has gone parabolic. If your company is not profitable your stock is doing great.
So now let’s look at the chart of SML and note that it broke what I would not consider to be a great line, but it does start at the April low, so it is worth noting it broke on Friday. The flatter blue line is still intact.
But step back: it hasn’t even come close to the highs made nearly a year ago. And it is basically trading where it was in October last year. I guess the lesson is to be sure your company is not profitable! I suppose if you have no earnings folks can’t value your stock so it’s better to have no earnings!
Away from that, the statistics in the Monday rally were pretty much as you would expect. Breadth was good and upside volume was 84%, pretty much the same as what downside volume was on Friday.
Overall volume was quite low. For the NYSE it was the lowest since September 26 and for the Nasdaq it was the lowest in the month of October. Do folks want to sit it out now? Or was it the Columbus Day holiday (bank holiday) that caused the slowdown?
Whatever it was, the indicators did not change. The (QQQ) s got the expected bounce off that line (and the high volume). But most of the action remains in the quantum stocks and the metals, rare earths and uranium, included in metals.
Which brings me to the Daily Sentiment Index (DSI) for gold and silver. They are both at 87, within striking distance of 90. We have yet to get a reading over 90 this year. We have come close so many times but each time we get that close these two precious metals sell off and reset.
Now I’m not just focused on the banks this week but precious metals!
