Yes . . . Absolutely . . . What’s happening has been completely on script. Here’s a paste-in of what I just posted in the Momentum thread:
Low-price stocks are a double-edged sword. Institutions often can’t own them, and again, that can be good or bad. The good part is that these are often under-researched companies that present attractive opportunities if approached thoughtfully. The down side is that small size is a substantial fundamental risk factor, a huge one. (See this on my blog for further details: “Small-cap Value” Is Not Just Value With A Smaller Size Filter – Acti-quant ).
The challenge in this is understanding the way market risk-on and risk-off environments impact this group. As we would expect from basic Economics 101, excess supply means lower prices and hence opportunities for the weakest buyers to buy. This applies in the capital markets as well as all others. For most of the period covered by our backtest data, we have seeb huge and often dramatically excesses in the supply of capital (and lower costs of capital, including interest rates). That caused huge amounts of equity capital to flow to the lowest quality companies, many of which are in the under $10 group.
In the past, low-priced-nano-cap-low-liquidity stocks were in great favor among p123’s most active users who, unfortunately, gave too much credit to their modeling prowess and little or no credit to the Fed for the results they achieved. When we had even a teeny weenie bit of tightening back around 2013, just after the first incarnation of designer Models came out, things got every bit as ugly as economic theory suggests. Many of the early designer models came from these users and the implosion of those models remans, to this day, the primary source of the ills that plague that offering. The tightening didn’t last so the party resumed and even now, Trump persists in bullying the Fed into keeping the spigot open.
I mention this to make the current generation of bottom feeders aware of the potential outcomes if the monetary climate changes.
Whatever you do, it’s important to always challenge yourself: Am I really good, or just lucky? Back in the early 2010s, when I edited a low-priced stocks newsletter, I measured myself against a custom benchmark I manually built on p123 and with Excel processing that measured only the bottom-feeder part of the market, a segment for which there is no established benchmark.
That was more about the smallest part of the small end of the market, but it applies to small in general. Capital remains in oversupply so small caps have th potential to improve near term — subject to the unfolding Trump lunacy and concerns he’s toss the world into recession in which case the riskier segment of the market can be expected to fare much worse.