One of the easier-to-spot market themes right now is the widening performance gap between large and small companies. While many behemoths are rapidly reclaiming lost ground, there are a growing number of little guys that remain, well, lost. Today we’re looking at four such stragglers that are top stocks to sell.
To see this trend, you can compare two of the Street’s favorite Indexes: The Russell 2000 and Nasdaq-100. The former will be your proxy for small-caps, and the latter will represent large-caps. While you could use the S&P 500, the biggest gainers are coming from the technology sector, which makes the Nasdaq-100 a more appropriate ticker. Its strength provides a more stark contrast to the Russell’s depressing drift.
The story for why small-caps find themselves losing ground in the recovery game is simple. They are the most vulnerable to an economic downturn due to their higher debt loads, dwindling cash balances, and lower credit ratings. These are all fundamental factors that cause investors to look more warily on small companies during challenging climates. And given the Covid-19 horror show that is wreaking havoc on Main Street, now seems like a perfect time for investors to shun higher-risk companies.
My list of stocks to sell contains numerous tickers, but here are four of the top picks:
- iShares Russell 2000 Index ETF (NYSEARCA:IWM)
- SeaWorld Entertainment (NYSE:SEAS)
- KB Home (NYSE:KBH)
- Yelp (NYSE:YELP)
Let’s explore the narrative behind their poor performance and why their price charts are flashing warning signs.
Small-Cap Stocks to Sell: iShares Russell 2000 Index ETF (IWM)
The easiest path to betting against small-caps is to short the iShares Russell 2000 Index ETF. It allows you to sidestep picking specific stocks and instead set yourself up to profit from the continued demise of the entire space. IWM’s rebound has returned the fund to the scene of its significant support break.
If the principle of polarity holds, this old floor will become a new ceiling. And that makes entering bearish trades against the $126 resistance area an attractive proposition. Instead of shorting stock or buying expensive puts, I like using bear put spreads. By keeping the cost low enough, we don’t need to use a stop loss if the trade sours.
The Trade: Buy the June $110/$105 put spread for around $1.25.
SeaWorld Entertainment (SEAS)
The social distancing trend has destroyed SeaWorld’s stock price. And it has largely sat out the market recovery. Sure, the initial oversold snapback was glorious. SEAS ramped 171% over five trading sessions. But the gains quickly fizzled, and with Thursday’s 11% decline, the stock is one wave away from revisiting its lows.
At a minimum, we’d need to see a push back above $13 resistance to reverse the short-term trend higher. It would mark a change in character and merit reassessing my pessimism. Until then, it’s game on for bears. Watch for a break below the $8.50 support pivot before pulling the trigger.
The Trade: Buy June $9/$6 bear puts for around $1.
KB Home (KBH)
On the narrative front, I see a tug-of-war playing out with homebuilders. The bullish pull of low interest rates is up against the bearish forces of massive unemployment and banks raising borrowing standards. Cheap money means little when people are out of jobs, and banks are demanding customers bring big down payments and sterling credit.
KB Home shares were demolished during the crash, falling 75% in less than a single month. Consider this an example for the ages of just how quickly the market can price in Armageddon. KBH has doubled off the lows but still looks vulnerable. It’s below the 50-day and 200-day moving average, suggesting more work is needed before the trends turn.
Watch for a break of this week’s low ($19.15) as your trigger for the following play.
The Trade: Buy the July $18/$14 bear put spread for around $1.50.
In scanning for stocks to sell, I focused on those that were quick to give back their gains after last month’s snapback. Failing to make a higher pivot high on their second bounce attempt also signaled that sellers were still afoot. YELP stock has both characteristics and strikes me as still vulnerable.
It’s one of the worst looking tickers on my watchlist, and that makes it a natural choice for short trade ideas. This week saw the company’s shares slip back below the 20-day moving average. A push above $23 resistance would make me reassess. Until then, I’m in the bear camp.
The Trade: Buy the May $20/$15 bear put spread for around $2.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, he held long-term bullish positions in IWM.