Settling in for my nightly perusal of the financial markets on a day when the Nasdaq, in particular, let it be known that holes do indeed exist in the game of September trading. It is by no means a normal act to give up an entire month's worth of gains in one solitary day. However, this is exactly what momentum names decided to do today.
The list of names that were caught in the midst of the debacle include my favorites: FB, TSLA, YELP, NFLX all gave up multiple weeks of gains in a single day. A reflection of a market that has been and continues to be high in risk and low in reward. A market, I should add, that has very little in terms of proportional interest of the players involved. The bids are relatively thin. The offers are also somewhat light. Whenever either side of the trade is met with some conviction, a sinkhole opens up beneath the market swallowing investors in rapid fashion.
Nowhere is this more evident than my crawlspace: Small-Caps. I have become accustomed to the cyclical nature of the small-cap space that sees investor interest in names ebb and flow like the emotions of a teenage girl at a One Direction concert. When the time comes, however, to deal with the receding of the landscape that is liquidity in small-cap space, it is never an easy task. What is already a group that is ignored by the 99% that occupy the investment space, crawls into a ball and gets buried beneath the soil until it is time shine again.
Many of the small companies out there are simply trickling lower not because there is any real selling, but rather due to the fact that there is zero interest presently in taking on risk in small companies. And the primary culprit behind this aversion to risk is plain and simply the fact that investor funds are overly focused in larger companies. This is a market that is driven by institutions who most often ignore smaller companies because of liquidity constraints. The retail investor, of course, still believes that Wall Street houses reptilian demons who sleep under the thick brush of the money forest surrounded by pointy ear elves that are trying to take investor's money. Retail is mostly nonexistent in the small-cap space, barring a handful of popular names that are widely followed.
So for small-cap investors nothing is left. The bids are empty. The offers are not met. The price trickles lower.
Once the tide turns, however....and it always does, the upside reaction is monstrous in nature. Especially in names that are so ridiculously undervalued, of which many exist in today's market.
The goal here is to rotate into those names in the coming weeks and possibly months. I want calculated concentration of the portfolios across only a handful of names. Diversification is for the unconvinced, uninitiated and ill-equipped. I want situations that are unseen by the public, but dynamically evolving behind the scenes. I want names that have multiple outs, in the form of various means of realizing hidden assets that reside on the balance sheet. And I think I'm gonna get all of this here soon.
All I can do now is wait. This quarter has been difficult. Barring a surprise on the upside, it will be our first negative quarter in nearly two years. With these results comes opportunity, however. And with that opportunity comes a string of future positive quarters.
It's the give and take of the markets. Just have to control the take and the give will take care of itself.
