Today’s my birthday. I’ve heard from a bunch of friends and family. My son’s out of town — he texted at 1:30 in the a.m. to make sure he beat his sister. Not that he should have been worried. She’s on summer break… in New Orleans… and she turned 21 less than a month ago. If I hear from her before 2 p.m. Eastern, I’m gonna think something’s wrong…
I’m at the magnificent Angel HQ in the very heart of Baltimore’s Mount Vernon district. We’re still not back to full capacity yet, but it seems like every day I see a face I haven’t seen in a year. Joni Mitchell sang that “you don’t what you’ve got till it’s gone.” But for me, it’s the renewal of acquaintances and friendships that is downright exhilarating right now.
Of course, I have yet to get a happy birthday from my stinkin’ ingrate Angel co-workers. Good to know my feelings are mutual ya buncha *#%%$@*!!!.
Moving on…
We’ve been waiting… and waiting… for risk appetite to return to the stock market. Get those animal spirits carousing again like they were in the second half of 2020.
I bet most people think stocks are down so far in 2021. Fact is, the S&P 500 is up nearly 15% this year!
It just feels negative because some big tech stocks like Apple and Tesla are down for the year so far. And of course, all the financial media can talk about is inflation and how badly screwed we all are…
Swinging the BIG Stick
But the facts on the ground are a bit different. So far this year, the algos that drive the stock market have done a masterful job jumping from sector to sector without ever doing any real damage to the technical picture for the S&P 500 and the Nasdaq. They’ve taken some big tech names down and replaced them with “reflation trade” names like U.S. Steel, Chipotle, and Freeport-McMoRan.
A six-month “churn” is probably the best way to describe it.
The area of the stock market that actually has been whacked is the small-cap market. And there’s a very good reason for this (and it’s not inflation fears).
Think about the massive sums of money behind the algos that drive the stock market. I’m talking about the money that Vanguard, BlackRock, Fidelity, etc., wield. Fidelity has $3.9 trillion under management. Vanguard has over $7 trillion. And BlackRock has $8.67 trillion. Those three combined have nearly $20 trillion under management.
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Now, you know what the total capitalization of the S&P 500 is? $31 trillion.
Yeah… talk about swinging a big stick… These guys pretty much are the market.
It shouldn’t really be a surprise that small caps suffer when the risk switch gets flipped from “hold my beer” to “buckle up.” And it’s not because investors are worried that borrowing costs are going to rise for smaller companies and eat into profits.
The majority of the cash that Vanguard and the rest hold is 401(k) money. And the majority of 401(k) money is sitting in S&P 500 index funds.
The bottom line for small caps is liquidity.
Animal Spirits
Small-cap stocks need speculation. They need hedge funds and individual investors to be feeling… IT. Small stocks thrive on acronyms like FOMO and TINA. Small-cap stocks frolic with the animal spirits.
We had animal spirits in the second half of 2021. My Alpha Profit Machine scored some amazing quick winners during those months, like 54% on Jumia (NYSE: JMIA) in three weeks, 115% on Mastech (NYSE: MHH) in two months, 69% on Upwork (NASDAQ: UPWK) in one month, and 53% on Veritone (NASDAQ: VERI) in one week.
I’m seeing signs that animal spirits are getting frisky again. One of my favorite small-cap stocks has rallied more than 50% in less than a month. The thing is, it’s a blockchain company, and it’s been rallying ever since Bitcoin started selling off. Coincidence? I don’t think so…
I think the “big boys” want blockchain, but they don’t want Bitcoin. And so they’re buying this $15 stock as secretly as they can. But I’m on to their little games. And you can get in on them too. Here’s how…
Until next time, Briton Ryle A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.
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