Stock Portfolio Updates: Small Caps Jump & Volatility Picks Up By: Christopher Mistal | July 18, 2024 | Email | Print

Unlike earlier in the week, today’s declines were broad based. DJIA, S&P 500, NASDAQ, Russell 2000, gold, crude oil, and bitcoin all declined. During the decline the CBOE Volatility index (VIX) spiked over 16 to its highest level since early May. It remains to be seen if this is the official start of the weakest part of the “Worst Months,” which historically begins shortly after mid-July and lasts through September. What can be said with a fair degree of certainty, just after mid-July, now has historically been the time of the year when volatility, measured by VIX, has begun to increase and the market has struggled.

 

 

In the above chart, weekly bars for VIX appear in the top pane and VIX’s historical seasonal pattern is graphed in the lower pane. The horizontal blue line in the upper pane is set at VIX’s close today at 15.93. Looking at VIX’s seasonal pattern, the black arrow highlights the historical trend in VIX from around mid-July low until a peak around mid-October. If VIX remains elevated, the summer rally may have come to an early end.

 

 

Also, of concern is how closely the market has been tracking the recent 21-year seasonal pattern for July. In the above chart the familiar 21-year patterns appear as solid lines and use the left vertical axis for scale. July 2024, through today’s close (July 18), are plotted as dashed lines and use the right vertical axis for scale. The magnitude of July’s first half gains this year has towered above the recent 21-year pattern, but the trend has been nearly spot-on. July’s peak may have occurred a day or two ahead of schedule depending on the index. Based upon the recent 21-year trend, the balance of July could be choppy to sideways.

 

Election years have historically been bullish with above average performance in June, July, and August, but as we pointed out in the July Outlook, 2024 appears to have gotten well ahead of average historical performance and is likely due for some mean reversion. Today may have been the start.

 

 

Over the past five weeks through yesterday’s close (July 17), S&P 500 rose 3.1% while Russell 2000 jumped 8.9% higher. Over the same period the entire stock portfolio advanced 1.8% excluding dividends, interest on cash, and any trading fees. Overall portfolio performance was held down by a sizable cash balance. This balance is the result of market forces and our seasonal overlay applied to the portfolio. We do not target a specific cash percentage in the portfolio. Digging deeper into the portfolio, Small-Caps performed the best, up 9.9% on average. Mid-Caps followed, advancing 6.7% and finally Large-Caps were up a modest 1.3%.

 

The surge in the Russell 2000 can be attributed to the increasing odds of a Fed rate cut and their valuations relative to many large- and mega-cap stocks. We suspect this nascent small-cap rally during a historically weak seasonal period for small-caps (page 114 STA 2024) could struggle to maintain momentum in the near-term. The widely anticipated 0.25% reduction in interest rates will not hurt, but at the same time it is not likely to help small caps all that much either as the Fed funds rate will still be over 5%. Even if interest rates were to decline, inflation, wage pressure and regulation headwinds will still remain.

 

Portfolio standouts over the past month include Super Micro Computer (SMCI), Mama’s Creations (MAMA), and AT&T (T). SMCI, the largest holding in the portfolio by valuation, rebounded to post a gain compared to last month’s update price. SMCI appears to be settling down, but still remains quite volatile trading in a wide range between around $700 and $900 over the past three months. We do not expect this trading actions to stop soon as reality has lofty earnings expectations to meet. SMCI is on Hold.

 

MAMA continues to shine and was recently added to the Russell 2000 and 3000 indexes. There is little doubt this has created additional demand for MAMA shares from the ETFs that track the Russell 2000 and 3000. Provided MAMA continues to benefit from its relationship with Costco, additional upside remains likely, but further gains could be delayed until after the “Worst Months” come to an end. Hold MAMA.

 

The oldest holding in the portfolio, and the only position in the red (when dividends are excluded), T is actually having a fair year for the first time in many. As of yesterday’s close, T was up 14.2% year-to-date. It was originally purchased for its dividend yield and T still remains attractive based upon this metric. Should the Fed begin cutting interest rates, T’s dividend could attract more buyers. Continue to Hold T.

 

All remaining positions not mentioned above are on Hold. Please see table below for updated stop losses.