Will the Rest of the Market Catch Up?
Why Louis Navellier is bullish on small-cap stocks … will we see the broad market catch up to tech? … today’s “pain train” is not being invested … a mindset shift to help join in today’s gains
As you know, tech stocks have dominated 2023.
Here’s how this looks, with the tech-heavy Nasdaq 100 surging 32% this year compared to the Dow Jones’ gain of just 1%.
Source: StockCharts.com
Now, being intentionally simplistic, one of two things is likely to happen over the coming weeks and months…
The tech surge will show its true colors as being “too much, too fast” and the Nasdaq 100 will fall back toward the Dow.
Or…
The Dow and the rest of the market will show new strength and join the tech rally, which will round out of the breadth of the market’s bullishness.
So, which one will it be?
Legendary investor Louis Navellier is betting on the bulls, and small cap stocks are the reason why.
The surge under the surface
Let’s jump to Louis’ Special Market Update Podcast from Accelerated Profits on Tuesday:
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
Well, folks, on the surface, it looks like not a lot is going on in the stock market, but under the surface, we have a massive rally in small-cap stocks.
The Russell 2000, as I speak to you [Tuesday], is up 2.6%
This is the annual Russell realignment, which now takes the entire month of June…and we are about to witness a melt-up in small-cap stocks this month.
To make sure we’re all on the same page, the Russell 2000 index tracks the two thousand smallest-cap companies within the Russell 3000 Index. “Small-cap” refers to a company’s market capitalization, which is a measure of its size.
Whereas a company like Apple is enormous, valued at $2.8 trillion, small-cap stocks typically range between $250 million and $2 billion.
Once a year, the Russell 2000 goes through a “Russell Reconstitution” in which the index is updated to reflect the changes in company-sizes over the prior year. This can be a catalyst for some stocks because many ETFs and mutual funds track the Index. When the Russell composition changes, the ETFs and mutual funds change along with it, causing enormous buying pressure.
Without getting into too many details, the Russell organization gave its preliminary list of index additions and deletions in May. Then, here in June, the list will be updated a few times before the final reconstitution list is set in stone, which will then be “official” when the market opens on June 26th.
With this context, let’s return to Louis:
This [realignment] takes the entire month of June, releasing preliminary lists after the close each Friday.
This will cause a lot of institutional buying pressure in small-cap stocks.
So, returning to our question of the top of this Digest, are we more likely to see the broad market melt up or the tech sector melt down?
Well, based on the jump in small-caps stocks, Louis is banking on a broader melt-up.
Since last Wednesday, the Russell 2000 has climbed more than 7%.
Better still, Louis believes this surge has plenty of legs thanks to the incredibly low valuations he’s seeing in small-caps:
I just looked at my small-caps, some at 4.7X this year’s estimated earnings…I’ve got lots of sales and earnings growth…I’ve never seen valuations like this in my lifetime.
So, I think we’re about to have a big, big small-cap melt-up.
It is certainly encouraging to see the bullishness spreading to more parts of the market today instead of remaining concentrated purely in a handful of tech stocks.
For more on how Louis is playing this small-cap surge, click here.
But if you’re nervous about stepping into the market today, you’re not alone
From Bloomberg:
Two words define a stock market that keeps grinding higher in the face of a long-awaited and widely expected US recession that threatens to erode earnings growth: Pain trade.
Chase those runaway gains when the storm clouds are gathering? Ouch.
Stay on the sidelines and miss out on the meltup driving the Nasdaq 100 to a 33% surge in 2023? Yeah, that hurts, too.
“This is a massive, massive pain trade,” said Etoro’s Ben Laidler. “The biggest risk is being out of the market, not in it. This is a massive pain trade for people.”
The analyst Bloomberg just quoted – Laidler – goes on to make a point we’ve stressed here in the Digest…
The stock market isn’t the U.S. economy.
So, while there’s plenty of evidence to suggest upcoming pain on Main Street, that doesn’t mean Wall Street can’t be surging at the moment – which, as you know, is what’s happening with tech.
How do you resolve this pain train in your own portfolio?
Well, consider a mindset shift. Rather than buy stocks today, just “rent” them.
In other words, adopt a trader’s mindset to capitalize on bullish momentum, while being ready to jump ship if that momentum sours
We suggested this last week in the Digest, highlighting Luke Lango’s market approach in Breakout Trader. It’s a way to benefit from a climbing market, even if fundamentals raise some concerns. It does this by focusing on just one thing…
Surging price strength.
From Luke:
Let’s say you found a truly atrocious company – we’re talking the opposite of a blue chip. It’s hemorrhaging cash, has awful management, and is in a dying industry.
But what if its stock price had just broken out and, hypothetically, was on its way to doubling from $5 to $10? Would any of those negative characteristics matter to you?
If what you care about is your personal wealth, they shouldn’t. Why would they?
All that would matter is that the stock is doubling while you’re invested.
This brings us to the core principle of our Breakout Trader system…
When it comes to wealth-building, the only thing that truly matters is whether the share price moves in the direction you want during the period you own the stock.
Well, the share price just moved in the direction that Luke and Breakout Trader subscribers wanted in a big, big way.
Yesterday, Breakout Trader subscribers locked in profits of close to 100% with their trade on AI-darling Yext.
The stock exploded almost 50% higher at one point (closing 39% higher) after management reported first-quarter results that beat expectations along with higher full-year guidance. It’s becoming clear that the software company is morphing into a leader in generative artificial-intelligence.
Breakout Trader subscribers have been riding Yext higher since February, so these latest gains push the trade’s total return to nearly 100%.
Here’s Luke:
Earlier this year, we told you we were going to focus on identifying promising breakout setups among artificial intelligence (AI) stocks, since we saw huge potential upside in those stocks in 2023. That is partly why we bought Yext (YEXT) stock. It was a promising AI stock with a great technical setup.
We’re really glad we did pull the trigger on YEXT, because it is up nearly 40% [yesterday] on strong earnings. We’re now up near-100% on our initial position in YEXT stock.
We think this is a great short-term selling opportunity.
Again, a big congratulations to all Breakout Trader subscribers. To learn more about this service, click here.
On the other hand, would if you don’t want to “rent” stocks?
While we’re on the topic of AI, if you don’t want to trade the sector, but would rather just put your money into the most attractive AI leaders and ride through whatever volatility may come, be sure to check out Luke’s free AI presentation from earlier this week.
He identified seven must-own AI stocks that he believes will become tomorrow’s mega-winners. The acronym for these seven picks is: SUPRMAN.
Big picture, between surging small-caps and roaring AI stocks, this market appears increasingly bullish. Let’s make money while we can.
Have a good evening,
Jeff Remsburg
More From InvestorPlace
The post Will the Rest of the Market Catch Up? appeared first on InvestorPlace.
