The bear market in small-cap and mid-cap stocks needs time to consolidate. Bear market rallies are often salacious affairs, tempting many undisciplined traders and investors back into too much long exposure, only to be burned badly when a new down-leg commenced.
In the near-term, it's important to remember, with the average bear lasting ~9 months, some bear market rallies can last for weeks, too. We often see multiple spirited rallies that all inevitably fail, which is the primary reason we mostly avoid playing such rallies. We view our time as more valuably spent working hard researching and identifying the next batch of multi-bagger inflection points we aspire to identify for our membership base – WELL AHEAD OF ALMOST ALL OTHER INSTITUTIONAL INVESTORS. Heady words, but the proof has been in the pudding over the long-term.
As such, while we would welcome a counter-trend rally back up to the 20-day SMA in the IWM the next few weeks to aggressively short into – call it $207-$209, with the 20-day SMA coming down a buck a day – we expect some backing and filling to be needed on the way up to these levels. A zig zag down and then higher a few times seems likely.
As an aside... it’s never a good sign when we are leading in with a short-the-pull-up trade on a major index, is it? :)
With mid-November 2024 marking the top in breadth for the indexes, along with the price highs in small-caps and mid-caps, we are only 4 months into this bear market. We already went down 17% peak to trough on the small caps, I think 16% on the mid-caps. A third retracement higher seems likely. Or is it?
After all, it seems clear to us, at least, that Trump and Besent are going out of their way to talk the stock market lower.
When is the last time you heard a Treasury Secretary, more or less, endorse a forthcoming recession? It is almost like he is trying to nudge the consumer to continue spending less:
“Mr. Secretary, can you guarantee the American people here and now that there will be no recession on President Trump’s watch?” NBC’s Kristen Welker asked Bessent on “Meet the Press.”
Bessent responded that “you know that … there are no guarantees, like, who — who would’ve predicted COVID?” “So, I — I can predict that we’re putting in robust policies that will be durable,” Bessent added later. “And could there be an adjustment? Because I tell you that this massive government spending that we’d had, that if that had kept going, we have to wean our country off of that.”
(Pardon the macro rant. But if you are not, at least, working on your macro game currently, I think you will get left in the dust this year, especially those who also view technicals with suspicion.)
So here's how we see it - tariffs are doing what they are intended to, i.e. sow discord and uncertainty into the economy by turning the status quo on its head. By deliberately slowing the economy down, Trump gets what he wants, which are RATE CUTS, which helps with the substantial new Treasury issuance forthcoming this summer.
Therefore, we think the tariff parade is poised to actually go into serious overdrive on April 2nd.
Instead of a “buy the news,” what happens if investors continue to QUICKLY shrink the acceptable market multiple such an uncertain economic backdrop should actually receive? What IS the appropriate market multiple? Is it 16x, 18x. It is definitely not 20x. We think, in addition to the stagflationary regime continuing to gather strength (higher prices from tariffs will take a few quarters to show up in inflation stats, remember), as we move into the 2nd half of the year, that market multiple will continue to shrink toward a 16-17x multiple, ultimately, catalyzing another serious down-leg in this bear.
If we are right, at the end of this next down leg, new leaders will begin sprinting higher even before the market turn is at hand. This is when we expect our process to kick into high gear. We therefore expect to finish this year strongly and to have an outsized year in 2026.
Of course, our macro playbook could be wrong.
In some ways, we hope it is wrong. This as that would mean we would start making money again more quickly than we think we will, which, is obviously, a good thing.
Think about it though. While they may be playing with fire by essentially pushing us to the brink of, if not directly into, a recession, isn't it more likely we see a sudden pivot on tariffs as we turn the corner into the Holidays later this year?
Trump loves a soaring stock market. (On this front, I actually give the guy credit for not budging yet with the correction that has ensued thus far.)
He will blame any recession or severe pullback in the economy on Biden and lie about dozens of other things along the way.
Ultimately, its about power. With that in mind, a goose of the economy that begins late this year and that extends well into and throughout much of 2026, may usher in a vivacious 20% rally that could unfold in months as we turn the corner into 2026.
How will we know when the turn will occur? Well for one, new leaders will manifest, spreading like wildfire day after day. We are just not there yet.
Turning back to the very short-term trend, another reason we expect a near-term counter-trend rally to ensue for a few weeks, potentially, is due to what we saw on Friday.
First, animal spirits returned to the quantum stocks, with QBTS's self-declaration of "quantum supremacy" catalyzing an impressive move higher.
Does QBTS follow through? It has a good window this week, with quantum computing having an entire day at the NVIDIA conference on Thursday. Friday's volume was super bullish:
Turning to software, OKTA is our favorite name. It did nothing the past few years, while many other software names doubled and tripled. Unfortunately, OKTA is one of only a handful of software names near recent highs. We do think it can go to $120 before the rally fails thereafter on a new market down-leg, whenever that ensues.
We would be long a lot of OKTA here if this market was in an up-trend:
Is $115 a trap or a quick pathway to $120+? Stay tuned:
OKTA 1-YEAR DAILY
Turning to China, BABA is the ONLY Chinese company operating at scale in BOTH cloud computing and A.I. They are also in the good graces once again with Xi and the government.
We think it can grind to $200 by the end of the year:
Great base too on MP, a domestic supplier of rare earth supplies. MP is up 50% thus far this year. Impressive accumulation:
In the small cap space, Xeris Biopharma (XERS ) is our favorite. This $742M market cap drug maker has three drugs in commercialization and raised its 2025 guidance significantly two weeks ago. Impressive:
Xeris Biopharma sees FY25 revenue $255M-$275M, consensus $239.77M
"Xeris has never been financially stronger. Record quarterly revenue exceeding $60 million drove positive cash flow of $2 million in the fourth quarter and generated Adjusted EBITDA of over $8 million," said Steven Pieper, CFO. "We expect 2025 total revenue of $255 to $275 million, which is over 30% growth at the mid-point. Further, we anticipate Adjusted EBITDA will remain positive going forward. Our accelerating revenue growth, coupled with our attractive and improving margin profile and disciplined capital allocation, will result in a financially transformative 2025 for Xeris."
XERS has actually followed through strongly since. We are being patient for now, working on the name in the background, while we wait for a big pullback on the next expected down-leg in the Russell 2000:
Things look bright for the company in the coming years, with $1 in EPS viable 3 years out, which, is well above already impressive multi-year consensus, which calls for EBITDA to rise 6X in the coming years from the $30M expected EBITDA forthcoming in 2025:
On the short side, NKE is in a very weak group, perhaps the weakest within the consumer space, with former big leaders like DECK down 7 weeks straight, diving 45%+. Dang:
If there were a time to be short NKE into a print, trading for 35X this year's EPS #s, along with it being in the weakest group out there, for us, this seems to be it.
We plan to initiate a very small short on into its print this week and then press the short if 2026 chatter is very weak. A break to new lows should presage a move toward $60, perhaps, quickly. We will use $74.95 as our stop in case we are wrong:
In summary, we remain in high levels of cash and are focused on self-discipline while, behind the scenes, intently researching a # of small-caps with multi-bagger potential we expect to recommend later this year. Names like XERS....
With only a third of stocks technically healthy on a long-term basis, sexy counter-trend rallies notwithstanding, we think THE LOW has not been seen and we are therefore remaining vigilant to not get sucked into any near-term rally.
Of course, we hope we are wrong and we see hundreds of breakouts emerge quickly (like they always do at the start of a new bull). Unfortunately, odds heavily favor Tariff Man sowing continued uncertainty and chaos until he gets his rate cuts. Which, for us, means further truncating of the market multiple, along with lower prices the next 2-5 months.
Be careful out there. Have a good week.
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