Small Cap Network Blog

I hate to get on my soapbox say I told you so, but have you seen the small cap metal and glass container stocks today? The Standard & Poor’s Small Cap Metal & Glass Container Index is up nearly 5% for the day so far. In fact, it’s the second best performing index out of about 300 industry/capitalization indices. It’s worth noting, however, that it’s just the small caps that are doing well in this group today.

I only bring up to reemphasize the point I made yesterday afternoon… these stocks were looking unusually strong, and there had to be a reason. For those who took the hint, you’re already well up in just a few hours.

In other words, the strategy works.

Now I’m not going to be naive enough to think that one day means a lot, because it doesn’t. That’s one heck of a coincidence though.

In light of the success so far, yes, I think I will continue to ferret out these niche industries, and even continue breaking them down into capitalization groups.

Either way, of the company’s I mentioned yesterday, Northern Technologies International (NTIC) and Myers Industries, Inc (MYE) are the major contributors to today’s big gains. Northern is up nearly 7%, while Myers is ahead by nearly 5%. There are a lot of these names that I didn’t mention also producing big numbers today though, so don’t limit your search to just a few ideas I pointed out.

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I’ve been sitting on this trading idea for a few days now, not really sure how I wanted to play it. I knew the market was overbought, and I knew it was ripe for a reversal. What I wasn’t clear on was which index to trade…lately there’s been a bizarre disparity between the Dow, Russell, NASDAQ, and the S&P 500. Buying put options on one isn’t the same as buying put options on another.

After doing some math, I think the biggest downside potential lies with the Russell 2000. So, I’m buying some puts on it….the September 730 puts (RUTUF), at a price of 20.90. With the index currently trading at 724.36, that strike’s about 5 points in the money. The cost is about $2090 per contract.

Basically what I’m looking for is more range-bound action. The Russell 2000 has been bouncing between 760 and 650 for several weeks. I think the recent encounter with 760 spoke volumes, and it now looks like we’re pointed back down again.

I’ve got a feeling the late-summer doldrums are going to let the index slide all the way back to support at 650. If that happens, my Russell 2000 puts will be worth $80, or $8000 per contract. That’s about a 300% gain…if it works out. As always, I’m not getting married to this trade - I’ll bail if I start to lose too much ground. Defense is more important than offense.

I’ll be tracking this trade in the blog, if you want to virtually stand over my shoulder as I assess it each day.

Are you a subscriber to the Small Cap Network newsletter? If not, you’re missing out on some great trading ideas and exclusive market commentary. To sign up, just go to the top right corner of any page of our website. You’ll be joining thousands of other subscribers who have already benefited from our news and views.