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Can Small Caps Outperform After Powell’s Tough Talk?

• Broad sell-off rattles bulls with many FED rate increases ahead to fight inflation.
• Best sectors of the week:  Energy, and commodities.
• Healthcare hardly defensive in Friday’s rout with losses above 4%.

Over the past two months we have focused on small caps as a sector that could boost your healthcare portfolio performance.  We picked eight small/mid cap stocks that were near a 2022 bottom. All had analyst ratings of “outperform or buy” or better with ample near term cash. All eight stocks were great trades in July and early August. ChemoCentryx (CCXI) was acquired for a 124% gain. On Friday Chairman Powell spoke briefly at Jackson Hole. Powell’s speech on bringing inflation under control would require further rate increases and ” will also bring pain to households and businesses ”

So first let’s survey the damage to our picks and small caps in general. Many are momentum stocks and very volatile. Here are the stocks still in the money from our July 5 post: CCXI, CYRX, EVH, MRTX,  Here are the worst performers down over 10% : MRNA, QDEL, VCYT. We are not making changes now in the picks but have traded around a few of our positions.  We still hold the XBI at a profit. Two weeks ago was the best time to sell the summer rally.

With such a major sell-off it would be difficult for smaller caps to  outperform so let’s see the trades in the week ahead. Energy has clearly been the sector to hedge your portfolio. I would expect healthcare and biotech to fare better than the general indices because of large and midcap earnings growth and M&A. But for now its better not to “Fight the Fed” because they are fighting the with the market. Now that everyone is scared of the Fed rhetoric it's better to wait a week or more as more data and earnings reports become available.

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