Stock Portfolio Update: Small Caps and Large Cap Defense Payoff
By: Jeffrey A. Hirsch & Christopher Mistal
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May 13, 2021
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Our go to leading market index indicator of late, the NASDAQ 100 (NDX), which is tracked by the widely held exchange traded fund (ETF) Invesco QQQ Trust (QQQ), may have found some support yesterday in the big sell off near 13000. Actually, using our wide chisel-tip Sharpie we would draw this current near-term support between the black line support levels in the 13000-13200 range on the accompanying chart.
 
[NDX Daily Bar Chart with support lines]
 
While we still do not expect any major decline here, we do not foresee any major upside either over the next six months – the Worst Six Month of the year May-October. We zoomed in and updated a few lines and notations on the charts we presented in our May Outlook and in our NDX Uptrend Broken, Support Under Pressure blog post earlier this week.
 
We are rather comfortable with our timely April 22 Best Six Months Seasonal MACD Sell Signal and with our outlook for a more typical “Reposition in May” period. The Fed can print money faster than the market can decline and more fiscal stimulus is coming down the pike as well as continued fuel from pent-up pandemic demand. 
 
Look for NASDAQ and NDX to rebound and lead the rally into early July through the rest of its Best Eight Months November-June and the historically strong first half of July in keeping with seasonal market patterns. Though, we do see resistance at the recent April highs near NDX 14000. 
 
If we do break below this 13000 support level there is support at the uptrend line since the September/October lows around 12900 and 12750, which would be an 8-9% pullback from the April 16 14041.91 closing Doji candle high. Below that are the March lows 12200-12420 which would be an 11-13% correction.
 
In our view all the stimulus, pent-up demand and Fed money will prevent any major down draft, while seasonals, valuations, technicals, internals, sector rotation and sentiment will keep a lid on the upside most likely until the fall. Please enjoy a more normal summer.
 
Portfolio Updates
 
Over the last five weeks since last update through yesterday’s close, S&P 500 slipped 0.4% lower while Russell 2000 declined 4.0%. During the same time period the entire portfolio climbed 0.6% higher excluding dividends and any fees. Overall portfolio performance benefited from a sizable cash position and strength in defensive positions as the market stumbled. Around half of the portfolio’s gains came from our Large-cap stocks which advanced 1.2% due to strength in energy and utilities. Small caps, led by financial positions contributed the rest of the gains, up 1.4%. Mid-cap stocks slid 3.5% lower on average mainly due to declines by Algonquin Power (AQN) and JetBlue Airways (JBLU).
 
AQN’s recent weakness appears to be correlated with weakness in alternative energy since January/early-February of this year. AQN does own and operate approximately 2.1 gigawatts of renewable energy assets along with electric, natural gas and water distribution. They also have wastewater collection systems. This is not exactly your typical utility company that many of us are familiar with. AQN actually looks more like a utility company of the future where renewables are the largest asset. Recent quarterly earnings were solid, and management has raised the dividend by 10% which at current share price equates to around a 4.5% yield. AQN can be considered at current levels up to its buy limit.
 
JBLU’s recovery run has likely come to an end after peaking in mid-March. The position is still up over 100% since last April, but the quick gains have likely passed. Prior to the Covid-19 pandemic JBLU was growing revenues annually. Unlike some rather pessimistic views on air travel, JBLU and the domestic portion of air travel are likely to recover quicker than expected. It will only take a family trip or two in an auto, sitting in heavy traffic, to make flying look attractive again. JBLU is on Hold. Should recovery take longer than expected then the stop loss should preserve the bulk of remaining gains.
 
Even though the broader Russell 2000 index of small-cap stocks was down over the last five weeks, our selection of small-cap stocks performed well. Strength in financials/banks lifted AUB, WSFS, SSB and CUBI. On April 12, CUBI became the fourth small-cap holding to double and in accordance with standard trading guidelines, half the original position was closed. Avid Tech (AVID) also enjoyed a significant gain over the last five weeks due to well-received quarterly earnings. AVID has since pulled back from its recent highs but remains above its positive trend line stretching back to October of last year.
 
Spiking inflation and firming Treasury bond yields appear to be taking some wind out of the sails of homebuilders. KB Home (KBH) is still up over 100% since being added to the portfolio, but it was down nearly 16% from its May 10 high through its close yesterday. Shares are bouncing today along with other homebuilder stocks. Here again we have likely seen the bulk of the quick gains as rates creep higher and raw material prices start to erode margins. KBH is on Hold.
 
Moving along to the Large-cap portfolio, defensive positions (shaded in light grey) have rebounded over the last week or so and are responsible for the bulk of the portfolio’s gains. Utility positions such as DTE Energy (DTE) and Duke Energy (DUK) appear to be regaining momentum after stumbling throughout the second half of April into early May. Further gains from utilities will likely depend on where interest rates go next and whether or not market volatility persists. Historically, utilities have been a top performer during the “Worst Six Months” and this time around there does appear to be plenty to be concerned about. 
 
Kansas City Southern (KSU) had agreed to merge with Canadian Pacific (CP) back in March. Apparently, the idea was also attractive to Canadian National Railway (CNI) as they made their own unsolicited and better offer. CNI’s offer values KSU at $325 per share compared to the original offer from CP of $275 per share. Both offers are a combination of cash and shares of the acquiring company. At press time, word is breaking that CNI will further sweeten the offer to cover the $700 million breakup fee to walk away from CP. Hold KSU.
 
Amdocs (DOX) had been recovering from its late-March selloff triggered by a short-seller report until late-April as broader weakest began to creep into the market. Second quarter earnings were essentially flat, but management did raise guidance and shares responded positively today, up 4.05%. Hold DOX.
 
Please see table below for specific stop losses and current advice for each position in the portfolio. All other positions not already mentioned are on Hold. As a reminder, dividend paying and/or generally defensive positions held in the portfolio are shaded in light grey.
 
[Almanac Investor Stock Portfolio Table]