At the beginning of March, I saw a likely setup for the stock market to finally break out of the recent range-bound activity, states Steve Reitmeister of Reitmeister Total Return.

Most likely bearish...but indeed could be bullish. I also wrote myself a note that if it did not unfold by the end of the month that I would have to change tactics. Holding true to that note is why I submit this update to is by no means an April Fool's Joke. I fully realize that the hedge we have is only good during bearish times. But not so hot in range bound times. And most certainly not a good idea if a new bull market emerges.

I have thought long and hard about what to do. I cannot give up 43 years of investment instinct telling me a bear market is still the most likely. So, the hedge has to stay in some form. However, I also want to put out stock picks that I think have a chance to outperform in range bound market...and would soar during bullish times. But how does one pick stocks with conviction when their gut tells them a bear market lies ahead? Aye, that is most certainly the rub!

This week the perfect solution dawned on me that I will spell out for you now. It may take a couple of read-throughs for it to sink in, but I am confident you will appreciate the virtue of this new approach. The bearish hedge will stay in place and continue to be the focus of the RTR portfolio and commentary. Then just like my POWR Value service, I will provide additional picks from our coveted POWR Screens Ten service. I believe the best choice is the Top Ten Small Caps screen (more on why below).

The choice of what to do is 100% up to you for which I see three logical paths:

  • If you are bearish like me, then ignore the extra stock picks. Just stay focused on the hedge.
  • If you are bullish, then ignore the hedge and just focus on these ten small-cap stocks given the truly exceptional track record of this strategy.
  • If you are confused and unsure of the path forward (which is quite reasonable at this time) then consider blending these strategies together. Like 50% in the hedge and 50% in the small caps (or whatever blend makes sense to you).

Yes, this approach puts a bit more on your shoulders to choose. Yet it is because I care so much about your success that I have provided this plan forward. If there is any doubt in your mind about market direction, then you should take the 3rd option (50% hedge + 50% small caps). The wisdom of this approach fits under the heading that is better to be only 50% right than 100% wrong.

Let's talk a bit more about the selection of the Top Ten Small Caps strategy. It is the second-best performing of all our strategies at +55.82% a year since 1999...yes, it is truly special. I was concerned that it might be too risky in bear market environments until I rechecked the performance in years the S&P 500 was down. And then I thought to well does it do at the start of a new bull market? In fact, the strategy has never had a year underperforming the S&P 500. Really making it a strategy for all seasons.

However, do not mistake this for being a "box of magic" where it goes up every day, week, or month. It means that over the course of a year that its advantages come shining through in the end.

Below is the current Top Ten Small Caps List in alphabetical order:

Apogee Enterprises, Inc. (APOG)

ARC Document Solutions, Inc. (ARC)

eGain CorporationEGAN

Ingles Markets Incorporated Class A Common Stock (IMKTA)

Limbach Holdings, Inc. (LMB)

Overseas Shipholding Group, Inc. Class A (OSG)


SciPlay Corporation (SCPL)

Torex Gold Resources, Inc. (TORXF)

Vishay Precision Group, Inc. (VPG)

Each weekly RTR issue will show you the freshest names on the list. This is similar to how I display the Top Ten Value stocks at the bottom of the POWR Value weekly commentary. Note that the Top Ten Small Caps strategy is a 100% quantitative approach to finding the very best small caps in the POWR Ratings universe. And because of a quant strategy, then it is recalculated daily which leads to ample turnover. Like over 400% a year. In fact, a stock was taken off today...may come back a day or two later.

Why? Because that's the way quant strategies operate. The computers have amnesia about what happened in the past. All that matters is how things get calculated with the new daily information. A stock that was the tenth best today could be the 11th best tomorrow...and that is all it takes to be taken off the list even though still a very attractive stock.

The solution I find best is to buy the full list of stocks equally balanced and then not trade again for four weeks. The best reason I can give you as to why is that the impressive performance results I shared with you is based on that very same four-week rebalance methodology. However, there is nothing wrong with you think picking the ones you want and skipping the others. The choice, once again, is 100% yours.

First, realize how confusing the stock market environment is right now. For as many brilliant people calling for a recession and bear market, there are equally brilliant people pounding the table that the new bull market has arrived. And because I have an economics background I can say firsthand that it is an inexact science where the outcome is very hard to predict. Kind of like guessing the weather three to six months from now.

So this new approach is an honest nod to the situation at hand to provide an alternative approach. Where I suspect most of you will blend the hedge and the stock picks...which I think is the most prudent at this juncture. If the bear market does emerge, I will likely keep the small-cap stocks around because if you are going to invest in any stocks these have a much better chance than most to rise up against the tide (like the 18% gain last year).

And if the bull market does emerge then we will drop the hedge...and drop the Top Ten Small Caps list as I will get back into stock picking mode with our main portfolio given all the tools available to me (and yes, some of those picks would likely come from this same list). If this note today is confusing to you...then please read it again. I think you will appreciate the virtue of this new approach and which route suits you best.

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