A Bet on Small Caps — and a New Option in European Banking

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

It was a flat week for global stock markets overall, with the Dow Jones up 0.65%, and the S&P 500 rising 0.37%. The MCSI Emerging Markets Index pulled back slightly by 0.46%.

Most of your Bull Market Alert positions traded similarly flat. Recall, however, that you did close your position in Wellpoint (WLP) last week for a solid 8.75% gain and you sold your Dec. 2013 $87.50 call options to lock in a 38.55% profit.

This week’s Bull Market Alert recommendation, ProShares Ultra Russell2000 (UWM), is a 2x leveraged bet on the Russell 2000 Index, a leading U.S. small-cap index.

While big-cap indexes like the S&P 500 have been hot this year, it’s the small-cap segment of the U.S. market that has been positively sizzling in 2013.

Here’s why I expect this trend to continue.

The domestic large-cap stocks that make up the S&P 500 get a big chunk of their earnings from international operations. That also means they carry the millstone of slowing economies in Europe, Asia and emerging markets.

In contrast, the U.S. small-cap market depends almost exclusively on the U.S. domestic economy. With the U.S. economy growing faster than many of its global rivals, small-cap stocks are benefiting disproportionately.

Smaller companies also tend to lead the charge at the beginning of any recovery. That’s why this year’s outperformance of small-cap stocks is a bullish indicator for the overall U.S. stock market.

Finally, the few days before Thanksgiving tend to be among the most bullish for the U.S. market all year. So, it is a good time to place a bullish short-term bet.

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So buy the ProShares Ultra Russell2000 (UWM) at market today and place your stop at $72.00. If you want to play the options, I recommend the January $80 calls (UWM140118C00080000).

This week, I am also recommending that you open an option position on Bank of Ireland (IRE) by buying April $15 call options (IRE140419C00015000). With the stock stuck in a trading range, the options are relatively cheap. Yet I see plenty of upside in this stock.

Portfolio Update

Bank of Ireland (IRE) dipped 2.10% last week. Bank of Ireland stands as the stronger of the two “pillar banks” in post-economic-crisis Ireland. It consists of five major divisions, including Retail Ireland (traditional Ireland-based banking), Bank of Ireland Life (insurance & investments), Retail UK (traditional U.K.-based banking), Corporate and Treasury (corporate and global banking), and Group Centre (miscellaneous management activities). IRE is a BUY.

Google Inc. (GOOG) traded flat last week. Google continues to be hard at work changing the world, and its latest target is the traditional smart phone. Motorola Mobility, a subsidiary of Google, creates the retail line of Motorola mobile phones. Motorola Mobility is currently working on a project dubbed “Project Ara,” which is essentially an effort to redesign the smartphone into a singular chassis consisting of interchangeable modular components. This approach will let users pick and choose swappable modules, allowing them to obtain any desired camera module, memory module, processor module, etc. Motorola Mobility also recently announced a new partnership with 3D-printing pioneer 3D Systems as the producer of these modular components. This project may reshape the future of the modern smartphone and break the “new phone every two years” cycle. GOOG is a BUY.

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AutoNation (AN) dipped 1.64% last week. From a technical standpoint, AN’s chart is developing a very bullish “inverted head and shoulders” pattern that may signal that AN is experiencing a bottoming effect, and produce significant future gains. AN is up 24% for 2013, after hitting a record high back September, and could very well rally back to $54.00 into the next quarter. AN is a HOLD.

iShares MSCI Spain Capped Index (EWP) rose 0.46% over the past five trading days. Spain is in the opening innings of its economic recovery, and all of its best days lie ahead. With the surrounding European economies seeing real recovery, the prospects for Spain are only set to improve. EWP’s chart is also bullish, bouncing up from the aggressively rising 50-day moving average last week as it appears ready to make an extended move higher. EWP is a BUY.

Trina Solar Limited (TSL) dipped 1.49%. TSL reported earnings of $0.14 earnings-per-share last week on $548.4 million of revenue. This revenue gain represents a 24% increase quarter-over-quarter and a whopping 84% jump year-over-year. TSL’s fundamentals improved in several ways, including a 20% increase in “shipped megawatts” of product, beating TSL’s own expectations. Gross margins also increased due to lower manufacturing costs. Surprisingly, all this good news did little to move the stock price upwards. However, with its price-level now stabilized post-earnings report, and the 50-day moving average rising rapidly, TSL is set for gains. TSL is a BUY.

Stratasys (SSYS) fell 6.41%. 3D-printing stocks had a tough week, across the board. Yet, your position in SSYS suffered the least. SSYS competitor 3D Systems fell 9%, ExOne lost 10% and Voxeljet plunged a whopping 39%. Although down significantly mid-week, SSYS showed excellent resilience as it made a strong comeback after touching the 50-day moving average. 3D printing is quickly gaining a significant foothold in the world’s manufacturing procedures and has nowhere to go but up. SSYS is a BUY.

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db X-trackers Harvest China ETF (ASHR) inched 0.15% higher for its first week in your portfolio. ASHR is the first U.S.-listed exchange-traded fund (ETF) to offer investors direct access to the Chinese “A-shares” market. Early investors will benefit from a significant tailwind as many new investors climb on board. ASHR is a BUY.

Finally, my colleagues at Eagle have been working hard on re-designing the www.EagleDailyInvestor.com site. Go check out the new site now and come back every day for exclusive stories, market commentary and analysis you won’t find anywhere else!

Latest Special Report

As a courtesy, I want to bring to your attention my latest special report, the newly updated version of The Top 12 Stocks You Should Buy Right Now, which features three of my top investment recommendations, as well as bonus picks from each of my fellow investment newsletter editors at Eagle.

In addition, take a look at Hedge Fund Secrets Revealed: A Simple Four-Step Technique to Manage Your Money like a Hedge Fund. This FREE report gives you the four-step process to maximize your profits just like the best investment pros do. Both of these special reports are accessible FREE on my website.

Nicholas Vardy

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U.S. stocks rose, capping a seventh week of gains for the Standard & Poor’s 500 Index, after an increase in the pace of hiring increased and pharmaceutical company shares rose due to favorable decisions by European regulators. This week, the Dow advanced 0.6 percent to finish with its seventh straight weekly gain, the longest streak since January 2011.

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