Since 2005, the IWM/SPY ratio has held this key support level 6 times. This support failed only once, in the midst of the Covid-19 pandemic. Now we find out whether the pandemic was the exception that proves the rule, or whether the pandemic structurally changed something about the relationship between small caps and large caps.
Small cap valuations look better than large caps
Check out page two of the latest Yardeni report titled "Selected P/E Ratios." They've got forward P/E charts for large caps, mid caps, and small caps, showing that forward P/E for large caps is still extended well above its historical range, whereas forward P/E for small caps has corrected sharply down back into its normal range of the last 20 years. In fact, we're well below the price multiple that small caps traded at throughout 2017.
www.yardeni.com/pub/stockmktperatio.pdf
Large caps just touched a strong resistance level
The Nasdaq index, heavily weighted toward large-cap tech stocks like Apple and Facebook, just touched 15,000 and seemingly got rejected from that level.
Large cap tech has benefited from soaring bond prices, but bonds seem to be meeting some resistance after this month's large inflation surprises. The Fed is doing its best to support bond prices with a "jawboning" campaign, but they've got a tough row to hoe after those inflation reports.
Large cap tech also faces a bipartisan push in Congress for antitrust legislation. Facebook, Apple, Amazon, Google, and Microsoft are among the names that may be affected if such legislation goes through. Of course, Tesla is also getting some bad press from the Solar City trial. So it's possible we will see the beginning of a real Nasdaq/S&P 500 correction here.
How I'm playing it
When I say I think small caps will hold this support, I don't necessarily mean that small caps will make gains. Only that they will make relative gains. That could happen by large caps and small caps selling off together, but small caps selling off more slowly. Or it could happen by small caps trading sideways as large caps sell off. In general, small caps have made their largest gains when large caps are going up, not when large caps are going down.
So one way to play this support level is with a two-tailed bet: long small caps, short large caps. Personally I am long a few select small cap names. I like Allison Transmission because of soaring car prices, and I like the KRE regional banking ETF because bonds look like they may have hit a ceiling, and because small lending banks tend to trade inversely with bonds. To hedge my rate bet, I'm also long on small cap gold miners, which should benefit if bonds continue to go up.
(I'm also long on homebuilders KB Home and MDC Holdings, although the homebuilder sector is struggling a bit due to backlogs, labor shortages, materials costs, buyer reluctance, and rising rates on 5/1 ARMs. I love the valuations on these two stocks, but I won't be surprised if that trade continues to go against me here.)
For the large cap short, I'm trying to be a little careful, because the big tech companies' earnings are coming up. I think I may wait to see what the results are before I take that leg of the bet. It would be easy to get wiped out by a big tech earnings beat. For now I've just grabbed some UVXY shares.
As always, this is just an idea and not investing advice. Good luck!
Small cap valuations look better than large caps
Check out page two of the latest Yardeni report titled "Selected P/E Ratios." They've got forward P/E charts for large caps, mid caps, and small caps, showing that forward P/E for large caps is still extended well above its historical range, whereas forward P/E for small caps has corrected sharply down back into its normal range of the last 20 years. In fact, we're well below the price multiple that small caps traded at throughout 2017.
www.yardeni.com/pub/stockmktperatio.pdf
Large caps just touched a strong resistance level
The Nasdaq index, heavily weighted toward large-cap tech stocks like Apple and Facebook, just touched 15,000 and seemingly got rejected from that level.
Large cap tech has benefited from soaring bond prices, but bonds seem to be meeting some resistance after this month's large inflation surprises. The Fed is doing its best to support bond prices with a "jawboning" campaign, but they've got a tough row to hoe after those inflation reports.
Large cap tech also faces a bipartisan push in Congress for antitrust legislation. Facebook, Apple, Amazon, Google, and Microsoft are among the names that may be affected if such legislation goes through. Of course, Tesla is also getting some bad press from the Solar City trial. So it's possible we will see the beginning of a real Nasdaq/S&P 500 correction here.
How I'm playing it
When I say I think small caps will hold this support, I don't necessarily mean that small caps will make gains. Only that they will make relative gains. That could happen by large caps and small caps selling off together, but small caps selling off more slowly. Or it could happen by small caps trading sideways as large caps sell off. In general, small caps have made their largest gains when large caps are going up, not when large caps are going down.
So one way to play this support level is with a two-tailed bet: long small caps, short large caps. Personally I am long a few select small cap names. I like Allison Transmission because of soaring car prices, and I like the KRE regional banking ETF because bonds look like they may have hit a ceiling, and because small lending banks tend to trade inversely with bonds. To hedge my rate bet, I'm also long on small cap gold miners, which should benefit if bonds continue to go up.
(I'm also long on homebuilders KB Home and MDC Holdings, although the homebuilder sector is struggling a bit due to backlogs, labor shortages, materials costs, buyer reluctance, and rising rates on 5/1 ARMs. I love the valuations on these two stocks, but I won't be surprised if that trade continues to go against me here.)
For the large cap short, I'm trying to be a little careful, because the big tech companies' earnings are coming up. I think I may wait to see what the results are before I take that leg of the bet. It would be easy to get wiped out by a big tech earnings beat. For now I've just grabbed some UVXY shares.
As always, this is just an idea and not investing advice. Good luck!
Comment:
Update: blue line is basically the breakdown level. Bit of a rally in this ratio today; we'll see if it holds.
Comment:
We're gonna test that support again:
Comment:
We opened below the breakdown level but have rallied back above it this morning. Keep an eye out to see if the breakdown reasserts itself later today. I'm pleased with the price action on my homebuilder stocks; they're holding up well this morning.
Comment:
We held the line today. I'm gonna go out on a limb and say the whole market rallies tomorrow, and IWM leads the way.
Comment:
GDXJ had an absolute trash day, especially considering that GLD closed the day up slightly. That's mostly because GDXJ has large exposure to silver, which was down 2% today. The junior miners ETF was also dragged down by its second largest holding, Australia-based Evolution Mining, after the city of Sydney tightened its lockdown. GDXJ had an interesting close from a technical point of view: right on top of the 200-day EMA.
Comment:
I basically went all-in on small caps in the last hour of trading yesterday. Feeling pretty good today. :)
Comment:
Retesting this support level.
Comment:
Strong bounce from support and a higher low.
Comment:
Keep a close eye on this one, y'all!
Comment:
Boom. We closed below support and will likely gap fill down.
