Everybody hates small-cap stocks.
We’ve rarely seen this kind of extreme positioning in any direction ever in stock market history.
We talked about it on Tuesday: Russell 2000: The Sheep Are Short, We’re the Wolves Lurking.
As a reminder, the Russell 2000 Index represents the smallest 2,000 stocks in the Russell 3000 Index.
Fun fact: The Russell 3000 Index represents more than 98% of all investable assets in the U.S. equities market.
The remaining 1,000 stocks in the index, the largest ones, make up the Russell 1000 Index.
As I wrote a couple of days ago, the ratio between the iShares Russell 2000 ETF (IWM), or the smallest 2,000 stocks, and the iShares Russell 1000 ETF (IWB), or the largest 1,000 stocks, is down to historic lows.
And I think that’s about to change.
What Are Small-Caps?
Whenever we look at an index or think about rotation in and out of certain groups, we want to make sure we understand the drivers of those fund-flows.
What’s in these things?
Well, in the Russell 2000, you’ve got a ton of regional bank stocks and you’ve got a ton of biotechnology stocks.
I wonder if this country actually needs 250 regional banks in the Russell 2000.
I’m thinking that’s a little bit unnecessary. But, hey, what do I know?
As for the 200-plus biotech stocks in the Russell 2000, that may seem like a lot. But I don’t personally have a problem with hundreds of companies trying to help people and save lives. I’m good with that.
In either case – regional banks and/or biotechs – I don’t get a say in the matter.
The bottom line is this: If you want a better idea of the next direction for small-caps, you must start with regional banks and biotechs.
That right there is a quarter of the entire index. And here’s what it looks like:
They haven’t done anything in years. They’re what we refer to in the business as a “hot mess.”
And everyone agrees.
Regional banks and biotechs are coming off some of their highest short interest ever.
Speculators in the futures market, which consist of asset managers and hedge funds, have their largest net short position in the Russell 2000 ever.
They’re all wrong.
We’re Buying Small-Caps
I decided to start buying biotech stocks at the end of July.
This week I added to my biotech positions.
You know what? I see even more opportunities out there that I want to participate in, and I’ll probably buy more biotechs next week.
Right now, I don’t have enough exposure to regional banks.
I encourage you to check them out, one by one – I did that yesterday, actually.
Find me a better looking regional bank chart than this one:
This is the artist formerly known as Bank of the Ozarks, now doing business as Bank OZK (OZK).
I think they changed the name because of the famous television show, “Ozark,” which won a bunch of Primetime Emmy Awards, Golden Globes, and Actors Guild Awards.
The show is all about drug trafficking and murder and stuff. So, probably not the type of thing a small regional bank wants to be associated with.
Maybe it was something else; I don’t really know.
I also have a hard time calling Google “Alphabet” or Square “XYZ.”
It’s hard to teach an old dog new tricks.
Besides, Bank of the Ozarks just sounds way cooler than Bank OZK, doesn’t it?
Anyway, there are other banks out there whose stocks look attractive right here. It’s not just OZK.
And everybody hates them.
Good.
We’re buyers.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs