For investors in small-cap stocks, this year has been quite a different experience from 2013, when the sector was raging and sizzling on the price charts.
Small-cap stocks are the laggards this year, with the benchmark Russell 2000 down nearly 14% from its peak and established in a bear market. The selling may be somewhat extreme at first glance but consider that the Russell 2000 surged an excessive 33% in 2013.
The reality is that gains like what we witnessed in 2013 were unwarranted; they were driven solely by the easy monetary policy put forth by the Federal Reserve and excessive froth in the stock market. We are now paying for the euphoria small-cap stocks encountered in 2013.
Now, while I continue to feel small-cap stocks are excellent longer-term plays, the short-term looks weary, given the technical breakdown on the chart of the Russell 2000.
Dumping higher-risk small-cap stocks is clearly the line of attack this year. But if the economic renewal holds into 2015 and the global economy doesn’t tank, we could see small-cap stocks rally next year. Keep this thought in mind, but know that at this time, it’s safer to shift your money to the large-cap or blue-chip stocks that have been battered this year.
Buying mature, consistent large-cap stocks on weakness makes sense as these companies have proven themselves to be steady players over time.
Think about it this way: Small companies will tend to struggle if the economy declines. Compared to the larger companies that can deal with several quarters or even years of underperformance, small-cap stocks would have a much more difficult time.
For … Read More
By Sasha Cekerevac for Daily Gains Letter | Feb 26, 2014
What year is this—1999?
Some of you might have been active investors in the bull market during the late 90s, as I was, witnessing the S&P 500 soar during that decade. In fact, the bull market was so strong back then that it created a false sense of confidence, as many people quit their regular jobs to become traders. As we all know, this didn’t last forever and the S&P 500 bull market popped and sold off sharply.
Just a couple of days ago, I read an interesting article about how small investors are back, seduced by the bull market, which has resulted in a very strong performance for the S&P 500 over the past few years.
There is nothing wrong with enjoying this bull market move, but when everyone thinks they are an exceptional trader over a short period of time, this worries me.
In the article, the active investor is an equipment salesman who is now “considering quitting his job to trade full time.” (Source: Light, J. and Steinberg, J., “Small Investors Jump Back into the Trading Game,” Wall Street Journal, February 21, 2014.)
This is what happens in a bull market; the consistent strength lulls people into believing they are somehow able to predict the future, when just a couple of years ago, they had no clue how to make money in the stock market.
That is the real test for investors—will your strategy work through a bear market as well as through a bull market? Just because you keep buying every dip in the S&P 500 and have, so far, been rewarded, this is not an … Read More
A few days ago, I went out for lunch with a friend whom I haven’t seen in a while. He is an active investor who manages his own portfolio. In the past few years, he has done very well for himself, to say the least; the returns on his portfolio have been amazing, and much better than what the key stock indices have provided. This intrigued me, so I asked him how he was able to do all of this in a fairly short period of time.
His response was very short and simple. “You see,” he said, “while many investors look for the ‘ten baggers’ or ‘home runs’ and get emotionally attached to their position, I focus on an approach that’s the complete opposite.”
“What I have seen in my experiences in the past, and I see it very often, is that investors have expectations beyond reality,” he explained. “They want the highest return in the shortest period of time by risking a lot. You have to be very lucky to see robust portfolio growth over time with these types of investment strategies.”
With this strategy in mind, here are three crucial steps investors should follow to grow their portfolio.
1. Be on the Lookout and Act Accordingly
Investment opportunities are present all the time, no matter what kind of market it may be. Be it a bull market, bear market, or range-bound market, investors need to know what kind of investment strategies to use. Bringing back my friend’s example, he knew the direction the markets were following was to the upside, so he traded his way through in … Read More
So this is what it looks like when global investors take their eyes off the Federal Reserve’s quantitative easing policy and focus on the real economy instead! As I’ve been predicting, the global sell-off of stocks looks like it’s beginning in earnest.
And you can pinpoint the exact moment investors and economists around the world began to get jittery. It was on May 22, right after the Federal Reserve hinted it might start tapering off its $85.0-billion-per-month quantitative easing policy as early as Labor Day.
The global markets haven’t been the same since.
Japanese stocks have entered bear market territory, tanking more than six percent last Thursday to a nine-month low on the threat of reduced economic stimulus from central banks. South Korean shares slipped 1.4%, hitting their lowest close in seven months.
Concern that China’s economic growth is grinding down has seen the Shanghai Composite Index trading at its lowest levels since mid-December 2012 and has dropped 12% from the year’s high on February 6.
One of China’s biggest trading partners may also be feeling the pinch. Australia’s economy expanded just 2.5% in the first quarter, below projected forecasts of 2.7%. While the country’s economy had been chugging along due to increased demand for natural resources, it is beginning to sputter thanks to the slowdown in China. Couple this with the country’s underperforming non-mining sectors, and you can see why Goldman Sachs and others think Australia could, after 22 years, slip into recession. (Source: “Australia’s economic growth rate misses forecasts,” BBC web site, June 5, 2013.)
On top of that, the World Bank cut its global 2013 growth forecast … Read More
With the Dow Jones Industrial Average and S&P 500 hitting record highs, many investors may be wondering if it’s time to re-jig their asset allocation, divert more money into the stock market, and take full advantage of the long-in-the-tooth bull market.
Normally, when we consumers go shopping at the mall, we look for deals, and buy when something is on sale. A rational buyer doesn’t put a sale item back, deciding they’d rather purchase it at full price. When it comes to shopping, we are a rational lot.
The same cannot be said for the stock market, especially during a bull market. If there’s one thing a bull market can do, it can give us a false sense of security that leads us to make irrational decisions—two factors best left out of the money management equation.
For starters, when the markets are doing well, we feel optimistic, downplay the risks, and overestimate our stock-picking prowess, regardless of how well-informed we are. Interestingly, depressed people are more realistic about their investments.
The emotional disconnect is one reason why investors do not sell stocks that are performing poorly. Studies show that the pain investors experience when taking a loss is two-times as great as the pleasure we feel when we make money. In an effort to avoid pain, we avoid selling stocks that actively erode our retirement portfolios. Hoping for a rebound, we’d rather deplete our retirement fund than deal with the pain associated with a modest loss. (Source: “Investor psychology: How to avoid over-confidence,” Modern Wealth Management web site, May 9, 2012, last accessed April 12, 2013.)
Where does that leave … Read More
The disconnect between the economy and Wall Street just gets wider and wider. And no one seems alarmed. Over the last four years, the Dow Jones Industrial Average and the S&P 500 have roared higher in spite of the fact that the U.S. economy is struggling to avoid a double-dip recession.
For the average American, there is no difference between a bull market and bear market. Unemployment remains high, so too does household debt. Gross domestic product (GDP) remains flat, consumer confidence is down, and housing is still fragile.
What’s keeping the bull market afloat? Not retail investors. If it weren’t for the Federal Reserve and the deep pockets of the well-heeled on Wall Street, the current Dow Jones trajectory might look a little different.
What can bring a bull market to a screeching halt? Usually an overheated economy and sense of overconfidence combined with lower unemployment, an accelerated GDP, and high interest rates. All of these ingredients are lacking in the current climate, leading many pundits to believe the bull market has more than enough room to run.
Still, this is not your average bull market, so the tried and true indicators for growth may not hold water. Many believe the current rally is a creation of the Federal Reserve and its opened-ended quantitative easing. The markets are also moving on thin volumes and low volatility. It wouldn’t take much to spook Wall Street and send the markets reeling.
So what could derail the current bull market? History and economics? Historically, the U.S. experiences an economic slowdown every four to six years. The current bull market is now in … Read More