Stock Portfolio Updates: Small-Cap Advantage Fading
By: Jeffrey Hirsch & Christopher Mistal
March 09, 2017
When the treacherous Ides of March and the festive remembrance of the patron saint of Ireland, Saint Patrick, approaches, the seasonal small cap rally often comes to a close. As illustrated on page 110 of the Stock Trader’s Almanac 2017 the Russell 2000 Index of small cap stocks begins to fade versus its large-cap counterpart in mid-March. The recent pullback in the market has many folks calling a top on an exhausted, overvalued market. Relax, the market is most likely consolidating its massive move from November and working off its rather overbought condition.
Trump’s first 100 days are about halfway over and things are heating up in DC. This ramped up political activity and the usually soft end of Q1 may push the market a bit lower before another leg up commences. We may end up getting a deeper correction after the next leg up in the Worst Six Months. But for now though the S&P 500 (along with the DJIA and NASDAQ) is holding pretty solidly above support – the Russell 2000 and the small caps less so. 
In the chart below of the S&P you can see the breakdown from the overbought condition in the stochastic, relative strength and MACD indicators in the lower three panes. In the top pane the S&P has some serious support around 2280 – that’s about a 5% correction from the high. 2280 is at the upper end of the big December-January consolidation just after the December breakout. And it’s right on last month’s blue-dotted line pivot point and just below the current green dotted line pivot point support and the pink line 50-day MA. The next level of support is near 2200 just before the December breakout.
[S&P 500 Daily Bar Chart]
The Russell 2000 on the other hand is right at support of about 1355. This coincides with the December-January consolidation, the November high and its current green dotted line pivot point support. Lower support near 1305 aligns with the upper end of the initial November rally after the election, the early December low and January’s green dotted line pivot point support.
[Russell 2000 Daily Bar Chart]
Portfolio Updates
In the nearly four weeks since last update, S&P 500 was 1.5% higher while Russell 2000 was down 1.9% as of yesterday’s close. The Almanac Investor Stock Portfolio’s blend of cash and long positions resulted in a 1.5% overall gain over the same time period. Our Large-Cap portfolio produced the most gain at 3.1%. Small-Caps were second best, gaining 1.7% while Mid-Caps rose just 0.1%.
Almanac Investor Small-Caps beat the broader Russell 2000 primarily because of a 75% gain by micro-cap stock Pressure Biosciences (PBIO). Due to recent gains, PBIO is on Hold. As a reminder, we will be observing standard trading guidelines and will sell half the original position should PBIO double in price. Global Brass and Copper Holdings (BRSS) and Century Communities (CCS) also contributed to gains in the Small-Cap portfolio. BRSS and CCS both recently traded at new all-time highs.
Tuesday’s new trade ideas aimed at capitalizing from falling cocoa prices, The Hersey Company (HSY) and Rocky Mountain Chocolate Factory (RMCF) have both been added to the portfolio. HSY was added at $108 while RMCF was added using its average price on March 8 of $11.18. Both positions have a slight gain. HSY could still be considered on dips below $108 and RMCF can still be considered at current levels up to a buy limit of $11.50. Cocoa is still in a downtrend with little to no signs of an end.
UnitedHealth Group (UNH) and Arista Networks (ANET) charged higher lifting the Large-Cap portion of the portfolio. After flirting with doubling in price for what seemed like months, UNH finally traded above $164.08 on February 15 and half the original position was sold on that day. ANET reported fourth quarter earnings in mid-February that blew away expectations and offered guidance that was also better than expected. UNH and ANET are both on Hold.
All other positions, not mentioned above, are currently on Hold. Please refer to the updated portfolio table below for Current Advice about each specific position. Please note that many stop losses have been updated as a result of recent gains.
[Almanac Investor Stock Portfolio – March 8, 2017 Closes]
Disclosure Note: At press time, officers of the Hirsch Organization, or accounts they control held positions in ANET, BUSE, CCS, IESC, MHO and SBRA.