When the market seems to be collapsing around you, mustering up the courage to step in and buy is hard. Yet, those are the days when your risk versus reward is most in your favor.
As the market retreats towards a support level, the further off the highs the support level is the more frightening it is. Several times I’ve thought to myself, “If we break that level then watch out!” Areas below these support levels often dip down into the great unknown or, for the very least, levels the market hasn’t seen in quite some time.
Take the Russell 2000 as the most glaring example today. While technicians have talked about the “Death Cross” until they’re blue in the face, the bottom of the year-long range at 1082 was the significant level of support. Unfortunately today we saw that level violated intraday. What you have to ask yourself is, “Was today’s dip below 1082 a short-term day trade, or will we continue downward?”
Good news is you don’t have to know the answer to that question. There are already several known variables you can use to your favor. First, you know the 1082 level has been support all year. Second, you know where the low of today was. So, you can clearly define your downside risk based on these two. Enter the market just above 1082 — as scary as it is — and you can set your stop just below today’s low of the day at 1077.96.
You can make this trade without using an exchange-traded fund or a futures contract. You can do it by buying a few small-cap stocks and using the market to help you gauge when to enter and exit the trade. Since we were so close to the support level, you can put a stop that much tighter. In addition to that, because the market has sold off so much from the highs, there’s a higher probability of a reversion to the mean than there is a continuation of extremes.
In order to find what I thought were some of the better small-cap stock ideas in this market I looked for Russell 2000 members that are “Zacks Rank #1 (strong buy)” or “Zacks Rank #2 (buy)” that have been outperforming this weak market. The thinking here is that if these stocks can do relatively well as the world collapses around them, then they should benefit as the rising tide lifts all the ships in the harbor.
Calavo Growers (CVGW)
Calavo Growers (CVGW) engages in the procurement and marketing of avocados and other perishable foods. Calavo Growers also works in the preparation and distribution of processed avocado. Calavo Growers is a “Zacks Rank #2 (buy)” and has outperformed the market by over 14% over the last four weeks.
CVGW stock price hasn’t been the only thing growing recently. In 2001, the U.S. consumed 483 million pounds of avocado. That number jumped to 1.4 billion pounds in 2012 and again to 1.7 billion in FY 2013. Currently Calavo’s main source of supply comes from California and Mexico.
The chart on Calavo looks pretty good in a very volatile market. CVGW broke above its 40-day moving average at the start of June when the stock jumped from $31.44 to $33.61. Since then, save for a small consolidation after that move, Calavo has been locked in a steady uptrend. After hitting a 52-week high of $46.22 CVGW has pulled back to the $44.35 price Friday. Calavo Growers is still trading well above its 40-day that rests at $40.41, indicating we are still bullish.
Jack in the Box (JACK)
Depending on what part of the country you live in, you may have seen this quick-service hamburger restaurant chain in your neighborhood. Jack in the Box (JACK) restaurants offer a broad selection of distinctive, innovative products targeted at the adult fast-food consumer. The Jack in the Box menu features a variety of hamburgers, specialty sandwiches, salads, Mexican food, finger foods and sides items. The core of the Jack in the Box menu is its hamburger products, including its signature hamburgers, the Jumbo Jack, Ultimate Cheeseburger and Sourdough Jack.
Jack in the Box has had several bullish analysts revise their next year earnings numbers to the upside. Eleven analysts have raised over the last 60 days. These revisions have pushed consensus estimates up from $2.70 per share all the way to $2.81, which helps give JACK a “Zacks Rank #2 (buy).”
JACK stock has been in rally mode since a two-day dip in the beginning of Aug. After dropping form a high of $59.82 to a low of $55.14 in just two days, JACK gapped up the next, leapfrogging $60 and closing at $61.25 on Aug. 7, 2014. A steady pullback to trendline support at $58.72 was enough to jumpstart JACK and see it rise all the way to new highs just shy of $69 yesterday before a small pullback through this morning. Already, it appears JACK is back on the move.
Don’t be afraid of buying this short-term bottom. If you’re wrong, you can get out quick and avoid a lot of downside pressure. If you’re right, you’ll be grinning ear to ear with this winning stock ideas.
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