Active traders often spend hours scouring the markets for niche segments that look poised to outperform the broader markets. One such group that has started to reappear in the results of many technical scans is small-cap value stocks. For many traders, scanning for small-cap value stocks is a particular favorite because the relatively small size of the underlying businesses generally offers lucrative risk/reward profiles.
From a fundamental perspective, screens for key metrics such as low price-to-earnings ratios and reasonable debt-to-equity levels help establish a level of confidence when it comes to buying. We’ll take a look at several charts from across this niche of the market and try to determine how traders will be positioning themselves over the weeks and months ahead.
Vanguard Small-Cap Value ETF (VBR)
When it comes to buying into a niche group of small value companies, active traders often turn to exchange-traded products such as the Vanguard Small-Cap Value ETF (VBR). For those that aren’t familiar, the fund’s managers seek to track the performance of the CRSP US Small Cap Value Index by following a passively managedfull-replication approach. The fund comprises 855 holdings from across the United States, and it trades with a reasonable expense ratio of 0.07%. While some holdings have been in the portfolio for a while and have grown beyond what many consider small cap, most holdings have similar patterns to the ones discuss in the paragraphs below.
For followers of technical analysis, it will be worth noting that the price of the VBR ETF broke above a key horizontal trendline in late 2019. The move higher over the past couple of months triggered a bullish crossover between the 50-day and 200-day moving averages, which will likely be used to mark the beginning of a major long-term uptrend. Stop-loss orders will most likely be placed below $129.78 in case of a sudden shift in underlying fundamentals.
Steris plc (STE)
One of the holdings of the VBR ETF that could be worth watching over the weeks to come is Steris plc. (STE). As you can see below, the price has also broken above the resistance of a major trendline and now looks well on its way to moving higher. This chart is an interesting example of how the support of a long-term moving average often props up the price on attempted sell-offs and how it can create an ideal entry point. Those traders who want to try and capture a better risk/reward may want to remain on the sidelines, hope that the momentum softens, and then try to time an entry with a pullback toward $153.49.
ON Semiconductor Corporation (ON)
Another holding of the VBR ETF that has an interesting pattern forming on its chart is ON Semiconductor Corporation (ON). As you can see from the four-year weekly chart, a symmetrical triangle has been forming for a couple of years. The recent breakout and subsequent pullback toward the long-term support levels is creating an interesting set-up for patient traders. Stop-loss orders will most likely be placed below $18.11 to protect against further weakness.
The Bottom Line
Small-cap value stocks seem to have been under-followed in recent years in favor of better-known larger counterparts. However, based on the charts discussed above, it appears as though 2020 could be the year for investing in this unique market segment.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.