The Bears Keep Trying (& So Far, Failing)

Over the last few weeks, I put out a couple of notes telling you that the market was flashing some warning signals beneath the surface, and to be cautious of a potential correction.

Now, that sentiment has started to make its way into the newspapers, TV shows, and mainstream media. In fact, on Monday morning, the Wall Street Journal’s front page had an article titled: “Markets Flash Warning Sign”.

But even as more investors latch on and propagate the market cynicism from the talking heads, all attempts by the bears to keep this market down have (so far) failed. Every time investors get nervous, and they pull their funds out of equities and put them into bonds, stocks turn tail and rally to all-time highs.

So what am I watching closely to see where these markets (and the small capitalization stocks I specialize in) are headed next?

First, whether any of the underlying fundamentals that got us here in the first place change. We were already on sound economic footing back in early November. But the election of Donald Trump came with new pro-business promises. For the market, it was like getting stimulus (fiscal) on top of economic growth – very bullish. There’s no sign yet that this force is ebbing.

Second, whether defensive stocks and bonds keep rallying. That’s a minor fly in the ointment in the short term, because it signals that animal spirits may not be as aggressive as hoped. But so far, money has only rotated into those kinds of stocks, rather than left the market outright, on pullbacks. So I’m not overly concerned.

Third, whether the recent trading patterns change. On multiple occasions, stocks have reversed intraday losses – and clawed their way back to even or even into the green. Just like a buoy under water, you can’t keep holding this market down. It wants to go higher and as investors, we can’t ignore what the positive price action is telling us.

Finally, watch out for the small caps after last night’s State of the Union address. Defense, Tech, Construction, Materials, and Engineering companies would be the likeliest beneficiaries of the potential increase in defense and infrastructure spending that Trump talked about recently.

Here are three stocks from a couple of those sectors that I will be looking at closely for my subscribers in Top Stocks Under $10:

1. Iteris, Inc. (ITI, Rated “C”) – A producer of intelligent road technology for federal and local government customers in the U.S. and Canada
2. ArcelorMittal (MT, Rated “C-”) – An integrated steel and mining company that operates around the world
3. Zix Corp. (ZIXI, Rated “C”) – a cybersecurity firm that specializes in email encryption and data loss prevention

* Note, in the Sub-$10 universe, one of our strategies is to purchase stocks that have the potential to be the next “B” or “A” rated firms, according to our Weiss Ratings model

Bottom line: As we approach that 2,400 S&P 500 target, it doesn’t hurt to listen to what the bears have to say and keep an eye on the underlying economic data. But barring any significant about-face in the fundamentals, or negative action on the tape, don’t be too eager to short or leave this market.

In the meantime, if you want to know when and how to buy stocks like these (or others I may ultimately recommend in their stead), be sure to check out my Top Stocks Under $10 service. Some of my recent picks have performed very well, and I anticipate more profits will be coming down the pike.

Best wishes,

Mandeep

Small Cap Edition, By Mandeep Rai, Senior Analyst Mandeep Rai has more than 15 years of investing experience, working as both a stock and credit analyst. At Weiss Ratings, he researches and evaluates financial and economic themes, and makes decisions on when to buy or sell specific shares for the Top Stocks Under $10 portfolio.