Small Cap Stocks are in a Bullish Cycle
We spend a proportionate amount of time analyzing price action, institutional sentiment and market breadth. Then we consider cycles and catalysts that might propel targeted industry groups to higher levels. We are looking for higher levels because the markets are in a long term bullish trend and until that character changes, we are only interested in bullish setups.
Bullish Cycle in Small Caps
Most novice traders are challenged with knowing when to enter a position and when to exit. With a bit of experience a trader starts to “feel” the market cycles. Being able to see it also helps confirm what stocks are doing and what they might do in the short. medium and long terms.
Homework – Cycles and Potential Candidates
The cycle in IWM is clearly trending higher. Dips to the “ascending” moving averages are what we watch for everyday. Price is above the 10ema, so we are only interested in bullish trades. If the dips are bought, we will see a “follow-through” day. It’s this bullish follow-through day that creates a confirmation signal. We already have a list of small cap stocks we’re interested in trading, that exhibit bullish setups, because we did our homework. In the current cycle, we have small cap biotech, material and energy names on our list.
Catalysts and Cycles
Continuing with our “workflow” we consider the catalysts that will propel sales and earnings. The most obvious going into 2018 is tax-reform. Most small-cap companies are US-based and pay the full tax rate under the law prior to the 2018 tax-reform act. And, to the extent that taxes decline, earnings will accelerate higher. EBITDA and GAAP will see positive cash flow increases. The “E” in PE will increase.
While this is only one example, it’s our focus on a repeatable and consistent “workflow” that gets us into the right index, sector, industry group and stock at the right time in the cycle. Ride the cycle and you make money. Use proper money management and you become successful; it’s all about the math. Period.
More on the subject of cycles:
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