Oh boy!
The markets loved Wednesday’s Federal Reserve news.
The Fed kept rates where they are… and also hinted or confirmed it would cut rates later this year and next.
No surprise, stocks moved higher. So, what next? Does our plan still make sense?
You bet it does. We’ll go into it more today.
Apple’s Big Trouble
In Wednesday’s Daily Cut essay, we played around with a relatively simple screen.
A “screen” is finance jargon for when you use different rules and ideas to reduce a large number of potential investments down to just a few.
In Wednesday’s example, we showed you one way to reduce the number of potential U.S. investment ideas from nearly 19,000 securities to just 223.
By the way, today, that same screen gives us 226 shortlisted stocks. Remember, when you have fixed parameters like we’ve used, the output will change each day.
For instance, we specified stocks trading above $5. Well, some stocks will have fallen below that, dropping out of our screen. Others will have climbed above it, and so on.
But just remember the reason we’re doing this.
Our concern is we’re “at the bottom of the eighth inning” when it comes to this market rally. (We thought about using a cricket analogy, but that would have muddied the waters rather than cleared them!)
For that reason, we figure the sensible option is to “lighten up” on large- and mega-cap stocks… and instead, take a portion of that money to put into small-cap stocks.
Let’s look at two examples today for why that makes sense. First Apple and this report from Bloomberg:
Regulators on both sides of the Atlantic are training their eyes on Apple Inc., unnerving investors with fears over fines and threatening its market dominance.
In the U.S., the Justice Department and 16 attorneys general are suing the iPhone maker for violating antitrust laws. And in Europe, the company is said to be facing probes about whether it’s complying with the region’s Digital Markets Act.
Shares of the company slid more than 4% Thursday, erasing about $115 billion in market value and taking their year-to-date loss past 11%.
Once the world’s most valuable firm at more than $3 trillion, Apple has underperformed both the Nasdaq 100 and the S&P 500 in 2024.
Apple reached a peak market capitalization of $3.1 trillion last December. Its current market cap is $2.7 trillion.
Now look at another company, Nvidia. Its current market cap is $2.3 trillion. That’s up from $1.2 trillion in December.
Here’s our point: Could one or both stocks go higher from here? Could one or both stocks go lower from here? Of course.
The point is they are both mega-cap stocks. If you own one or both stocks, they are likely meaningful positions. By that, we mean if you own them, they could each account for 3–5% of your total portfolio… maybe more.
Now replicate that across other large- or mega-cap stocks in your portfolio, and it means you have a lot on the line on any given market day.
Where to Allocate Your Money Now
Our question to you is: Can you cope with those moves? Can you handle such moves? And can you afford to deal with the potential for those stocks to fall 20% or more in the coming months?
Only you can answer that.
But you should answer it rather than just ignore it. That’s why we like the idea of trimming positions in stocks like those (not necessarily selling everything, but something), and reallocating a small part of that cash to small-cap stocks.
As an example, maybe you sell half your Nvidia stock, then take 10–20% of the proceeds and put it into one or two small caps.
But where? We showed you a sample screen on Wednesday. Here’s another. We omitted technology, biotech, financials, and energy from Wednesday’s screen. Here, we include them.
So, check out this selection.
Data Source: Bloomberg
All the other parameters apply from Wednesday’s screen. Only the included sectors have changed.
Again, remember, this is just for fun. The idea is to give you a starting point for your own research and to show you an example of how to run a stock screen.
As we say, we believe we’re in the late innings of this market rally. Now is the perfect time to be conservative by cutting market exposure while, at the same time, using a small amount of capital to bet on a late-innings rally.
It’s the only strategy that makes sense.
Regards,
Kris Sayce
Editor, Legacy Research Group