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

It's time to consider the "Little Guy" index for investing

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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.

I'm Worried About Small-Cap Stocks -- Here's How We'll ProfitAfter 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 Corporation (NYSE:MCD) 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…

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Article printed from InvestorPlace Media, http://investorplace.com/2017/04/im-worried-about-small-cap-stocks-heres-how-well-profit/.

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