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Small-Caps Look Exciting in an Otherwise Tepid Market

·3 min read
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We start this Hump Day looking at pre-market futures, which show the tech-heavy Nasdaq nosing back out ahead of the pack, +50 points. Both the Dow and S&P 500 are hovering around +5 points, on no major economic reports or business developments to grasp the narrative from the placid lake of a market we’ve been floating on this week.

That is, unless you have been heavy into small caps of late. The Russell 2000 is up 80 points over the past week, +20.5% year to date. Compare this to the Dow and S&P +14% or so since the start of January, or the even-more tepid Nasdaq, +9.5% in 2021 so far. Not to say these indexes are suffering — the S&P is only 10 basis points from its all-time trading high — but small caps has been where the action is.

Most of this disparity within the indexes has taken place recently, over the past two months or so. Just look at the iShares Russell Microcap ETF IWC, up 11% over the past month, during the same recent period the major indexes have been passing through the tunnel flat. Some of this has to do with the Great Reopening taking place, but some of it is undoubtedly due to speculation and gaming of meme stocks and SPACs.

Take a peek at Clover Health CLOV this morning, for reference. The private health insurer was borne into the stock market early this year as a SPAC, behind a reverse merger from venture capitalist Chamath Palihapitiya. Its initial trading history is forgettable, but since becoming the latest Reddit darling meme stock, shares are up 24% in today’s pre-market, more than double where it was to start the week.

Small businesses overall, however, are experiencing some challenges, particularly regarding the labor market. While small businesses account for 50% of the U.S. labor force, roughly half the companies currently are struggling to fill open job positions. Just yesterday we saw a record 9.3 million job openings for April 2021, many of which exist in the small-business segment. Will, at some point, our beloved small meme Reddit stocks face the reality of market valuations?

Meme stocks are perhaps the single-biggest story in the market through the first half of the year, maybe even eclipsing the Great Reopening itself. Don’t believe me? Check out GameStop GME, which reports its Q1 after today’s closing bell. The company is expected to bring -67 cents per share in the quarter on $1.18 billion, with a rather unspectacular seven negative earnings surprises over the past five years.

Yet GameStop, which was the first of the Reddit r/wallstreetbets companies to squeeze shorts without mercy, is still +1640% year to date, +5950% over the past year. Due to its negative bottom-line, the company does not have a price-to-earnings ratio. And the company does more than 8.5 million in average trading volume. It has sent the shorting portfolio managers into full retreat, yet the company refuses to give up its gains. Will today’s earnings report mean anything?

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GameStop Corp. (GME) : Free Stock Analysis Report

iShares MicroCap ETF (IWC): ETF Research Reports

Clover Health Investments, Corp. (CLOV) : Free Stock Analysis Report

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