It May Be Time to Play Small Ball
This column was originally published on RealMoney on March 27 at 12:00 p.m. EST. It's being republished as a bonus for TheStreet.com readers.
Let's focus on the incremental positives in a market that's been perfect for daytraders but a real pain for everyone else. I know how tough it is to keep your sanity when every rally gets faded and every selloff attracts support. Hopefully this March madness will come to an end soon.
We've been stuck in a long stretch of high noise and low signal. The greatest risk during these choppy periods is to overtrade, because every uptick looks like a bull market and every downtick starts a panic. In reality, not much has happened in the financial markets this month, but things could change quickly in April.
Note the terrible reward/risk profile in the small-caps so far this year. Since the start of February, the iShares Russell 2000 Index Fund (IWM) has risen less than 2 points, although it shows two major selloffs in the same period.
In turn, this rally might send OBV to a new high for the year and generate yet another bullish divergence. These dynamics would follow the melt-up scenario for a spring rally I discussed last week. But don't bet the store on this outcome just yet. The market has given us so many head fakes recently that this could be yet another false dawn. The third incremental positive for the current market is that six of the top 10 percentage gainers in Friday's trading were single-digit stocks. It's been well over two years since this particular group has drawn intense and persistent buying interest. That finally appears to be happening again. This suggests a reawakening of risk-taking by retail participants, which would be a positive development for the broad markets. Low-priced stocks are one of the few corners of the ticker tape not dominated by institutions or hedge funds, so it's a direct read on the activities of small-market players. This is especially encouraging given the weak performance of junior gold stocks this month. This speculative subsector dominated single-digit gainers through the early part of the year, but a recent correction has left many of these issues treading water.
|Source: eSignal Power Scan|
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