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Why Traders Need to Pay Attention to Small Cap Stocks Right Now

In this week's interview with Toni Turner of TrendStar Trading Group, we discuss the explosive quarter for social media stocks, and possible weakness in the small cap space, and the

In this week's interview with Toni Turner of TrendStar Trading Group, we discuss the explosive quarter for social media stocks, and possible weakness in the small cap space, and the implications that could have on the broader market.

EQ: While we're currently in the slower summer months and the broader indices have been relatively quiet, we're still seeing some meaningful movement in individual names. Is this a stock picker's market right now?

Turner: I believe it is. I amlooking in two sectors right now,  Industrials and Materials. In Materials, chemicals especially have been doing well. If you will notice, DuPont (DD) and Dow Chemical (DOW) have done very well recently. I am also watching LyondellBasell Industries (LYB) , which is based in the Netherlands. I’m just watching it to see if it will stay above the 50-day moving average. It’s consolidating here.

I’m not taking on a lot of big share size here because I am just a little dubious, and honestly, am expecting  summer profit-taking soon, unless we can get some really good news that will bring volume back in. Right now, investors are looking ahead to September, with the prospect of decreasing stimulus and the debt-ceiling battle in Congress. Neither of those events are positive for the markets.

EQ: Social media stocks have had a very impressive earnings season, with some of the leaders maybe hitting their turning points. Has this group caught your interest?

Turner: I have watched it from afar but it does appear that the Global X Social Media Index ETF ($SOCL) has done very well recently. It’s risen from $14 to $17, so it’s gone up about 20 percent in the last month or so on the earnings of companies like Facebook (FB) .

Facebook looks overvalued to me in the short term. So, if I were to enter, I would wait for a pullback. That also is true for LinkedIn (LNKD) . I would like to see it at a more reasonable valuation. .

EQ: One area of the market that often gets overlooked is the small-cap market, which could serve as a telling indicator of the broader strength of the market’s direction. Looking at the Russell 2000, what are you noticing here?

Turner: I am noticing that while the other indexes are up, the iShares Russell 2000 Index ($IWM) is not as enthusiastic as the Dow Jones Industrial Average, the S&P 500, or the Nasdaq. Actually, if you look at the intra-day chart, the IWM has a pivot line at the  $104.20 level..

IWM’s price is hovering just above that level now. Can it stay above it and then use it for traction? We will have to see if it can remain above it, and then climb up to the next  line of resistance of $104.70, and then in turn, use that  for support. The IWM has a lot of work cut out for it here. It’s made up of domestic U.S. companies mostly, and we know that if the IWM or the Russell 2000 is not as enthusiastic or excited as the rest of the market, then at some point the broader market usually follows it downward.

EQ: Are there any other sectors or industry groups that you're watching right now?

Turner: I am back to my favorite, which is the Utilities sector and the Utilities Select Sector SPDR ($XLU). People may say that it’s not exciting, and many traders ignore  it, but in Toni’s Market Club, many of our biggest and easiest profits have come from taking position trades and stocks from the XLU. For example, we held Aqua America Inc. (WTR) from December of 2012 through about April of this year for about a 20-percent no-stress gain .

I am still interested in water and I am still watching it now. With global clean water shortage a very real concern, I am keeping an eye on the PowerShares Global Water Portfolio ($PIO) to see if it breaks higher from here.

As the markets put the debt ceiling debacle in the rearview mirror, more than a few issues remain open.