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ITPM Flash Episode 25 is a video presented by the Institute of Trading and Portfolio Management(ITPM).


Market Divergence and Trade Opportunity:

  • Highlights a divergence in the market related to the recent CPI report signalling lower inflation.

  • Notes the impact of lower inflation on the 10-year yield, leading to rallies in all US indices.

  • Suggests a potentially constructive environment for the small-cap sector due to lower borrowing costs.

Performance of Small-Cap Sector:

  • Raj contrasts the performance of the small-cap sector against larger indices.

  • Despite initial assumptions of higher borrowing costs negatively affecting small caps, the Russell ETF (IWM) has shown relative strength since the November CPI report.

Potential Small-Cap Rally:

  • Raj speculates that if rates remain stable or trend lower, a significant rally in small caps may occur into year-end and the beginning of 2024.

  • Discusses the possibility of a broadening market rally, with laggards potentially experiencing significant gains.

Options Market and Stock Examples:

  • Mentions observed upside call buying in the IWM.

  • Provides examples of individual stocks in the small-cap sector, such as Burlington and Gap Stores, exhibiting potential for substantial moves.

Specific Small-Cap Stock Recommendation:

  • Recommends looking at small-cap stocks making money, with low expectations and lower P/Es.

  • Highlights The Geo Group (GEO), a small-cap stock with potential catalysts related to border security and immigration policies.

  • Discusses potential scenarios, including a bill passing in January and the impact of a border crisis on Geo's business.

Options Strategy:

  • Advises looking at options in the market for potential opportunities.

  • Provides an example of options trading on Geo, suggesting a risk-reward ratio based on potential stock price movements.


  • Encourages listeners to find opportunities in the market, even in unexpected areas.

  • Wishes everyone a Happy Thanksgiving.


I'm Raj Malhotra, senior trading mentor at ITPM.

I want to wish a Happy Thanksgiving to all of you. As we're nearing the end of earning season and the broader indices are nearing year highs, I want to highlight a very interesting divergence that seems to be set up for a trade going forward.

Now, it's no doubt that the last CPI has been an impetus for all markets to rally higher, clearly signaling lower inflation. This signal has had the direct effect of lowering the 10-year yield. About a month ago, the 10-year yield had peaked at around 5%. Now it's trading around 4.4%. This, in turn, has led to rallies for all US indices.

I think this rate move should be especially constructive for one sector going forward, which is the small-cap sector. The assumption by most was that higher borrowing costs would crush small caps. In a general sense, it has, compared to the other indices, even if not on an absolute level.

If you just look at these relative year-to-date charts, the S&P is up about 19%, the NASDAQ ETF (QQQ) is up over 47% this year, and the Russell, which has been a big lagger, is up just about 2% this year. There might be some room to catch up.

However, since the day before the November CPI report – granted, that is a small sample size – the IWM, which is the Russell ETF, is up about 52%, while the S&P and QQQ are only up about 3%. Even if you assume the recent market move was a short-covering rally, the relative outperformance of the Russell since the initial November 14th big market move tells me that there may be relative strength going forward.

Should rates stay here or trend lower, we could definitely see a rip-your-face-off rally into year-end and into the beginning of 2024. The broader market, the S&P, could rally 10% or 20% higher, and if that happened, the move in small caps might be even bigger.

If you look in the options market, there's been a lot of upside call buying in the IWM. Whether it's by hedge funds or trading desks, it's hard to know – probably a little bit of both. But due to the valuation differences right now between big caps and small caps, the big names that rallied so much this year might also rally, but the broadening out of this rally could mean that laggards move a lot higher.

You're starting to see that in some names. Look at the chart of Burlington, formerly known as Burlington Coat Factory. It's an off-price department store discount retailer. Everybody hated the stock. Even with a 20% rally, it's still down 20% for the year. Could there be some catch-up here? Who knows, possibly.

There are many other names that exhibit similar characteristics and just slightly better metrics that can really move these beaten-down stocks a lot higher. Another example might be Gap Stores (GPS), up 60% this month. There are a lot of candidates in the small-cap sector, and I really think they can outperform in the next few months.

This time, I actually do think small caps are set up to outperform. A 10% rally could easily get a 20% rally in the IWM, and due to upside call buying, once this thing starts moving, it can move quickly and violently due to gamma hedging. If we got a 20% move in the IWM, you could easily find individual names that could be up 50% to 100%.

I would look to names in this sector that are making money, that have low expectations and lower P/Es. Remember, it's always easy to beat low expectations. One narrative change can turn things around quickly, especially if you can identify catalysts.

This is probably especially true in areas of the market non-tech. Given tech strength this year, a name like The Geo Group (ticker: GEO), a small-cap name with about a $1.2 billion market cap and around a 10 P/E, could be interesting. Six years ago, the stock was trading above 30, and now it trades below 10 bucks.

In this, you've got a recession-proof business called prisons. Yes, jails. It manages jails and detention centers. One could argue that prisons do better in a recession if that actually does happen. Geo's largest customer is ICE (Immigration and Customs Enforcement), accounting for 44% of Geo's revenue.

It has a very obvious catalyst that the market is still ignoring – the border crisis. The US border with Mexico is a disaster, and everyone knows it, Republicans and Democrats. If a bill gets passed in January, the stock will boom. Even if not, US citizens may start demanding better border security, and Biden will have to at least pretend to be tougher on the border going into an election year.

Think about what happens if there's a terrorist attack inside the US, given all the global risk and the lack of border policy. These border crossers and immigrants, if that happened, would be immediately rounded up and have to be housed somewhere. Geo would benefit from that.

Even if none of these things happen, this small-cap stock could easily go to 15 bucks with a catalyst, plus a broader market rally. Why not 20 bucks or higher? Looking at the options market, you could pay 80 cents for the March 10 strike calls, which gives you about four months for this thing to pay off. If the stock gets to 15, you get a 5:1 risk-reward ratio; over 5:1 if it goes to 20 bucks.

Remember, sometimes crime does pay. So even if you are bearish, there are cheap ways to play the upside in this market in case you're wrong.

Now go out and find those things.

Happy Thanksgiving!

I'm Raj Malhotra. See you on the other side.


The information provided in this content is for informational purposes only and should not be construed as financial advice. The content is not intended to be a substitute for professional financial guidance or personalized investment advice. Always seek the advice of a qualified financial professional before making any financial decisions. The author and the platform do not assume any responsibility or liability for any financial consequences arising from the use of the information provided. Users are encouraged to conduct their own research and consult with a financial advisor to make informed decisions based on their individual circumstances.

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