Industrial strength small-cap action

  • Dycom (DY) sold off after yesterday’s earnings announcement
  • Small-cap telecom infrastructure stock had rallied 480% off March low
  • Could also benefit from industrial sector tailwinds

We’ve all been hearing a lot lately about rotation away from tech and toward long-languishing areas of the market, including small caps and industrial stocks.

While no one needs to be in a hurry to write the obituary for “big tech” (ask a few portfolio managers how eager they are to forever cut the cord with Apple, Microsoft, Google, Amazon, and Facebook), there’s certainly been some changing of the guard in the US market over the past few months.

If recent developments do represent a meaningful shift, it’s still in its infancy: The Nasdaq 100 (NDX) tech index is still up more than twice as much as the S&P 500 (SPX) and small-cap Russell 2000 (RUT) since the March 2009 bear-market lows.

But it’s also true that the RUT has edged ahead of the NDX in the rally off the March lows, a role reversal that really kicked in over the past couple of months—the RUT has gained more than twice as much as either the NDX or the SPX since September 23:

Chart 1: Russell 2000 (RUT), Nasdaq 100 (NDX), and S&P 500 (SPX), 9/23/20–11/24/20. US stock indexes price chart. RUT up more than 2x NDX and SPX over past 2 months.

Source: Power E*TRADE

Of course, the question is, how long will it last? The RUT has had many bursts of outperformance in recent years, but they’ve always been exactly that—short-lived exceptions to the rule. That said, the small-cap index’s recent run has been a little more significant—if it holds on the remainder of this week, it will have been the strongest US index for seven of the past 11 weeks.

These dynamics are what made Dycom (DY) jump out of yesterday’s LiveAction scan for largest percentage declines. After meeting earnings estimates but coming up short on revenue projections,1 this small-cap industrial stock (telecom infrastructure) tumbled 18% in early trading, although that didn’t put much of a dent in the stock’s 480% rally off its March low:

Chart 2: Dycom (DY), 2/13/20–11/24/20. Dycom (DY) price chart. Earnings pullback after huge rally.

Source: Power E*TRADE

The move, which dropped DY roughly 23% below the average Street analyst target of $84,2 also brought shares close to the support provided by the late-October lows around $64.

There’s no reason DY couldn’t break below the October lows and test another level (like the support zone defined by the June high and early-October low). But traders who anticipate continued small-cap tailwinds as well as industrial-sector relative strength—industrials have been the market’s strongest sector over the past three months—may be looking at pullbacks in stocks like DY with more interest than they have in quite a while.

Market Mover Update: January WTI crude oil futures topped $45/barrel for the first time since early March, extending their rally off their November 2 low to more than 30%.

After falling 3.4% in early trading yesterday, Novavax (NVAX) rallied more than 6% off its low to close up on the day.

Today’s numbers (all times ET): MBA Mortgage Applications (7 a.m.), Durable Goods Orders (8:30 a.m.), GDP (8:30 a.m.), Advance International Trade in Goods (8:30 a.m.), Weekly Jobless Claims (8:30 a.m.), Advance Retail Inventories (8:30 a.m.), Advance Wholesale Inventories (8:30 a.m.), New Home Sales (10 a.m.), Consumer Sentiment (10 a.m.), Personal Income and Outlays (10 a.m.), EIA Petroleum Status Report (10:30 a.m.).

Today’s earnings include: Deere & Co. (DE).


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1 Dycom Industries (DY) Tops Q3 EPS by 1c, Revenues Miss. 11/24/20.

2 TipRanks. Dycom Stock Forecast & Price Targets. 11/24/20.

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