Smallcap Discoveries: Weekly Update: July 18

- Tweet0
- 0
- Pin It 0
- 0
- Subscribe to RSS
Subscribe

Subject: Smallcap Discoveries: Weekly Update: July 18 - 22

July 18 - 22

Market Commentary

Major North American stock markets were solidly higher this past week. Some of the first batch of corporate earnings have come in better than expected, there has been a resumption of Russian gas deliveries to Europe and data showing continued slowing inflationary pressures helped pushed markets up. The DOW was up 2.0%, Nasdaq was higher by 3.3% and the TSX was up 3.2%

Consumer discretionary and materials were the 2 best performing sectors while communication services and utilities were the weakest performers over the past week.

General investor sentiment continues to be at or near historic lows which is usually and indicator that we are at or near market bottoms.

Fund managers’ sentiment on corporate profits hasn’t been this bad in a long time.

According to Jason Goepfert, founder of Sundial Capital

“The bear market is over. In modern markets, the S&P 500 has never lost ground over the following year when advancing volume was 87% or more of total volume for 2 out of 3 days coming off a 52-week low. It has a perfect track record.”

Many investors are maintaining a very bearish stance and have set the bar so low that almost any positive or less bearish data is likely to bring more cash into equities. Last week’s bounce after the bearish inflation data is a good example of this.

Energy

Oil and North American natural gas moved in completely opposite directions this past week. WTI oil closed down at $94.70 after breaking above $100 mid week.

Natural gas had a very strong week and closed at $8.30 and is up over 50% since the beginning of July.

Gasoline continues lower. This is the one commodity that I believe has the greatest influence on inflation and with the continued weakness we’ve seen since early June it’s helping to temper inflationary expectations and flow through goods and services pricing. Gasoline tapped new 4-month lows on Friday.

We saw continued increase in North American drill rig activity and once again this past week it was Canadian drillers jumping more than their US counterparts.

As far as other commodities, most major commodities were flat to lower. Grains were mostly lower on news of an export deal allowing for resumption of grain exports from Ukraine.

Most industrial metals were flat while gold was slightly higher.

Is the US Dollar weakening?

Higher interest rates in the US and rapidly deteriorating economies around the world have made the US dollar the least dirty short in the closet. The US dollar has been on a tear this past year and it has caused some severe pain for many economies and entities that have large amounts of debt in US dollars. Countries like Sri Lanka, who have to buy US dollars to pay for energy and other commodities, are struggling severely under the strong dollar. A higher US dollar has cushioned the inflationary blow for US consumers and has increased the pain for others who have to buy things with a weakened currency. This volatility has destabilized many countries and businesses.

But how long can this go on? Remember, the cure for high prices is….. high prices. A US currency that remains too strong for too long can slow down the US exporting sector and also set off other economic reactions. Some have started calling a top in the US dollar. I’m not quite convinced we are there yet but I’ll be watching the trend lines here very carefully as a reversal in the direction of the US dollar will be very telling and could be a sign that the risk on trade is back in full force.

Construction and Housing

I’ve been very bullish of late on the life science sectors as I continue to see data both technical and fundamental, that points to that sector having bottomed and starting a new uptrend. The other sector I’ve been watching closely has been the construction/housing sector. It has been one of the hardest hit areas as it is one of the most sensitive when it comes to interest rate changes. With interest rates moving higher it is to be expected that the industry will face headwinds.

This may be the most unliked sector of them all. Everyone seems to be on the sell/short anything to do with real estate trade. I try to keep my eye out for the crowded trade. If you identify these opportunities and time them right, you can get very outsized returns when they turn. I like what I see in this sector.

Here is what the construction sector has looked like measured by the sector ETF (ITB). It’s up about 26% from its low in the last month.

DR Horton (DHI), the largest home builder in the US released earnings numbers last week. Earnings were slightly better than expected while revenues were lower than analyst estimates, and the company lowered sales guidance. The market responded by taking the share price by 5.9% to end the week. DHI is up 30.6% since hitting its low about a month ago.

Other home builders, like Beazer Homes (BZH) have done even better. BZH is up 50.2% in the last month. And UFP Industries (UFPI), a construction product manufacturer, also reported earnings this past week. There stock rallied 11.1% on the results and the stock is up 31.1% in the past month. Fantastic returns for a sector that was likely pricing in complete business Armageddon.

Remember, when there is a bullish reaction to bearish news usually it’s an indication of turn in investment sentiment and can be a great early signal of a new uptrend.

New 52-week highs

I’ll be posting the notable sector new 52-week highs on a regular basis. This is a great way to see early moves in new sectors and general sector strength. This week the top 3 sectors were life science with 25 of the 70 daily new 52-week highs followed by technology with 12 new 52 week highs and financials with 9.

Things we are watching

Monkeypox - WHO declares global health emergency. Two names that I’ve been following for months now are Bavarian Nordic (BVNRY) and Siga Industries, (SIGA). BVRNY has one of the very few vaccines for Monkeypox and Siga has approval for their version of a vaccine as well. These stocks are likely to gain more attention as Monkeypox generates more headlines.

Another Covid wave is here. I’ve lost count but I think this is number 7. Let’s see what this one brings.

The world has learned how to cope with Covid and now it seems to be nothing more than a minor inconvenience. The concern is that this is a mutating organism and as long as it doesn’t change too much and throw us back to square one, we will be fine, but we shouldn’t be too complacent. The odds might be low that we get a much nastier variant, but they are not zero.

To your wealth,

Paul and Trevor

Buys and Sells This Week

Bought SIGA @ US$13.86

Smallcap Discoveries

Select Portfolio

Vitality Products Inc (TSX.V: VPI) Price - $0.05 Market Cap - $2M

VITALITY SIGNS EXCLUSIVE DISTRIBUTION AGREEMENT FOR UNITED STATES WITH THRESHOLD ENTERPRISES
Press Release https://tinyurl.com/4vyktv2f

VITALITY SHAREHOLDERS ELECT AUDRA J. DAVIES TO BOARD OF DIRECTORS; ACHIEVES 50% FEMALE REPRESENTATION
Press Release https://tinyurl.com/yzcev2ed

iFabric (TSX: IFA) Price - $1.49 Market Cap - $44M

iFabric Corp Updates on Clinical Trial for Treated Medical Scrubs
Press Release https://tinyurl.com/4rsd4an5

Smallcap Discoveries

Select Watchlist

D-Box Technologies (TSX.V: DBO) Price - $0.105 Market Cap - $23M

D-BOX Benefits from Moviegoers Flocking to Theaters
Press Release https://tinyurl.com/954297e6
D-BOX offers haptic immersive sim racing entertainment at the Grand Prix de France
Press Release https://tinyurl.com/3z3c3yba

Titan Logixx (TSX.V: TLA) Price - $0.47 Market Cap - $13M