I'm Worried About Small-Cap Stocks -- Here's How We'll Profit

Jared Levy's picture

Wednesday, April 19, 2017 - 12:00am

by Jared Levy

I recently strolled into my neighborhood McDonald's to satisfy my dreadful McNugget addiction. The assistant manager immediately recognized me, not for my nugget-purchasing frequency, but my appearances on Fox Business Network.

After the 25-year-old interrogated me for 10 minutes about investing in today's target, I realized it was time to short it. Our conversation was the coup de grace in a series of indicators all pointing to lower prices for this ETF. And don't worry, I told her it wouldn't be a good idea to buy it in the short term.

For as much flack as McDonald's gets, the restaurant chain has provided many with some very powerful ideas in the world of finance.

Back in 1986, The Economist conceived the "Big Mac index" as a means of measuring global currencies against one another for a quick inflation check. In January 2017, the average Big Mac in America cost $5.06, while that same concoction of meat and cheese in China sold for just $2.83 (when you converted yuan to U.S. dollars).

In simple terms, the Big Mac index indicated the yuan was undervalued against the USD by 44%. Useful information if you're contemplating a currency trade... but what about stock prices?

Quick and dirty indicators like the Big Mac index are great ways to confirm an objective thesis.

Over the years, I've developed my own Big Mac type of indicator that's a bit more anecdotal, but it's worked like a charm. My indicator doesn't necessarily focus on food and doesn't measure inflation or currency -- it's a gauge of information saturation.

Introducing: The Little Guy Index
I call it the "Little Guy Index." It's loosely based on the theory that has become one of the oldest adages in the market: the little guy or retail investor is often the last to know, and last to buy before stocks correct.

When nearly everyone who isn't in the investing biz is talking about a certain stock or index (one that's not going through bankruptcy or a well-publicized crisis), my theory is to check the fundamentals to see if that stock has been overbought in all the excitement. When word has gotten to the local McDonald's, it's safe to assume that the majority of consumers also know the news.

This leaves little upside surprise left!

There's a small portion of the world's population that focuses on stock details, but most simply don't need to; it's not part of their world.

So when food service professionals, bartenders, fast food workers and laborers start to seriously discuss investing in a particular area, my alarms go off.

It's not that these people aren't bright or worthy of an opinion; it's just the fact that many of the hardest working people in our country simply don't have the time or need to absorb some of the economic and corporate statistics that my subscribers and I over at Profit Amplifier rely on.

I've found in my own research that the majority of investing laymen work more off investing "tips" and hearsay among their social networks, both traditional and online.

Over the past few weeks I've seen a noticeable rise in activity surrounding small-cap stocks, like those held in the Russell 2000 ETF (NYSE: IWM). From Twitter (#smallcaps) and Facebook to MarketWatch, The Wall Street Journal and many more, small caps have been trending.

Barron's even dubbed 2017 "the year of the small-cap."

With nearly everyone and their mother now recommending small-cap stocks, it's likely that most everyone is already in the action and less informed investors (like my McDonald's manager friend) are buying at the top, holding the index from falling.

What many of them don't realize is that a "best-case scenario" is already built in!

And just as I predicted last month before my subscribers and I booked a 25% profit in 21 days, the index is looking rich once again and ripe for a pullback to its first support level around $133.

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The increased chatter over the past week or so has helped push the index close to the overbought levels I indicated in our last trade. While we've recently seen a slight correction, based on the details of the trade I recently recommended to my subscribers, there's still 28.6% in potential gains to be had as the index moves lower toward support.

If you want to read the details on why I believe the IWM is overvalued, you can check out my original analysis by becoming a Profit Amplifier subscriber.

For now, just know that we have a chance to capture a 28.6% profit over the next couple of weeks from just a 2% move to the downside. That's because we use a conservative options strategy to magnify our profit potential rather than simply shorting securities outright.

If you've ever been curious about trying a new way to bag quick profits without taking on an excessive amount of risk, then I invite you to give my strategy a try. By signing up for Profit Amplifier, you'll gain access to a bevy of educational material as well as all of our trades. To learn more, go here.

Jared Levy does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.