How to Take Advantage of Three Recovering Stock Sectors

Enduring the coronavirus pandemic for the last few months has taken a toll on everything and everybody, from the stock market to the employees actually eager to get back to work. However, with the coronavirus seemingly on its way out and the country reopening, signs of normalcy are coming back into play. And with it, three major opportunities for traders to realize some gains may be coming back as well. Taking advantage of these potential opportunities may take some careful planning, though.

Small Caps Back in Style, and I Don't Mean “Yankee With No Brim”

Small cap stocks were taking it on the chin as the coronavirus settled in, mainly because small caps weren't exactly in a great position. They didn't have the kind of online presence, or infrastructure, to let them continue working through the pandemic. They didn't have the kind of cash on hand that would let them weather the storm effectively.

However, with the economic recovery, small caps are coming back. This has been amply demonstrated by gains in the iShares Russell 2000 ETF NYSEARCA: IWM which is up 16% over the last month. Given that the S&P 500 has only gained 10% in that same time—if a 10% gain can ever really be called “only”—that makes it a sector worth paying attention to.

While there's still enough shakiness in the broader overall market to make a complete pile-in on small caps not the best of ideas—now is not the time to sell Microsoft NASDAQ: MSFT to raise cash to buy small caps—it's likely going to be worthwhile to have a presence of some sort therein.

Emerging Markets Are, Well, Re-emerging

Meanwhile, another surprise gainer came out of emerging markets, as represented by the iShares MSCI Emerging Markets ETF NYSEARCA: EEM. EEM is up 14%, which still compares more than favorably to the gains posted by the S&P 500. As noted by Newton Advisors president and founder Mark Newton, this is mainly connected to issues of US dollar valuation. The recent changes in the dollar have given emerging markets a leg up, and EEM has been a beneficiary therein.

Emerging markets, Newton further noted, are off lows seen back in 2018 and 2019, which provides a solidly bullish signal to get in on the action. The dollar has further room to weaken, Newton asserts, and that should provide a little extra legroom for upward momentum in emerging markets.

The Financials Are Coming Back Too!

In what may be the biggest surprise turnaround, financial stocks—as measured by the Financial Select Sector SPDR Fund NYSEARCA: XLF—are posing a comeback as well. Granted, they're not beating the S&P 500 by all that much, posting 12% gains to the S&P 500's 10%, but gains are gains, and in this market, they're especially welcome.

This bounce is a little more tenuous, Newton notes, as he doesn't figure the bounce back on this front will last long. Selling into these when fall arrives will be the path to tread, Newton asserts. Still, as gunshy customers unwilling to handle germy cash look for other payment options, and banks continue lending, some life should come back into the financial stock sector.

A Temporary Recovery?

Newton's assessment of the financial sector wasn't exactly uplifting, but his assertions on the other two sectors added up to the same thing. The bounce-back we've seen so far is likely the result of large-scale overselling rather than specific market cases, so taking advantage of the short-term price recovery and then selling off and taking profits might be the best solution.

It's hard to dispute this; we know that large portions of the market were oversold as the panic set in back in mid-March, and stockholders sold off everything to finance their latest Costco stock-up run. So seeing loose money come back into the market would mean that these three sectors would get at least some boost from a combination of a halo effect and a “rising tide lifts all boats” philosophy. The markets, in general, are on the way up, so some battered elements would get some extra life as well.

This doesn't exactly bode well for small caps, emerging markets, and financial stocks, but recovery is recovery, and sometimes that has to be good enough. Still, some gains will be had, stability will likely reassert itself—barring any further calamity—and dividends will be re-established if they haven't already. That's a plan worth considering all by itself.