The Russell-2000 and the majority of small-cap stocks have sold off in the last week, with a rising U.S. Dollar undermining sector buying interest. The index is rapidly approaching intermediate support, predicting a strong bounce, but taking exposure through a broad-based index fund might not offer the strongest returns. Instead, consider buying a basket of the index’s best-performing components, expecting them to outperform during a recovery wave.
The Russell has so far failed to join the S&P 500, and other blue-chip benchmarks at bull market and all-time highs stuck below a lofty December high that followed the euphoric post-election rally. The current decline could signal the pause that refreshes, ahead of a powerful breakout or the next phase of a topping pattern that eventually brings the group down to earth. In both cases, the next bounce should restore bullish sentiment and offer low-risk opportunities.
Ohio-based Shiloh Industries Inc. (SHLO) builds systems that reduce shock and vibration in automobiles and commercial vehicles. It’s carved three vertical rallies into the mid-20s since the late 1990s, with equally vertical declines highlighting the cyclical nature of its industrial operations. The stock bottomed out at $3.06 in February 2016, three years after topping out at $25.34, and entered a buy cycle that reached $16.69 on March 2.
It then turned sharply lower with other small caps, losing nearly three points in a single session. If the past is prologue, the current uptrend will eventually add eight to ten points before topping out so this short-term decline should be buyable, ahead of a strong bounce. The 3-day pullback looks incomplete, suggesting continued downside that reaches the 50-day EMA, which is rising toward $12.50. That looks like a low-risk entry price, ahead of a quick recovery wave.
Textainer Group Holdings Ltd. (TGH) owns, manages and leases intermodal containers through its Bermuda locale. The stock entered a brutal downtrend in 2013, with selling pressure accelerating through 2015 before coming to rest at a 5-year low just above $7.00 in February 2016. A bounce to 16 got sold in April, giving way to a slow-motion decline that tested the prior low in November.
The subsequent uptick has now completed a double bottom reversal, signaling the first uptrend since the 2013 all-time high at $43.96. In turn, the stock could post significant upside in coming years, along with a resurgent shipping sector. It’s been pulling back for the last 3-weeks, carving a complex decline that could reach the 50-day EMA at $13.25 and offer a low-risk buying opportunity.
Carbonite Inc. (CARB) provides software and cloud backup products for small and medium-sized businesses. The stock came public just above $10 in 2011 and traded up to $21.10 ahead of a decline that reached an all-time low at $5.75 in October 2012. A proportional bounce into 2013 got sold, triggering a 2015 test at the low that attracted healthy buying interest. It’s gone straight up since that time and has now reached the post-IPO high.
Price action since November looks extremely bullish, carving a small scale cup and handle pattern that could trigger a breakout and rally into the mid-20s. The stock is now testing the early February high after rallying out of a short-term symmetrical triangle pattern. Aggressive market players can buy the breakout, with a lower-risk entry below $20 if it pulls back to test new triangle support.
The Bottom Line
Market players are dumping speculative plays aggressively ahead of next week’s Federal Reserve meeting, which is likely to yield a quarter-point rate hike. Buyers are likely to reload positions at new support and lift these stocks to higher ground, with the group’s leadership posting the strongest returns.
<Disclosure: the author held no positions in aforementioned stocks at the time of publication.>