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First Quarter Wrap-Up

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I thought it would be instructive to check out what has happened in the market during the first quarter.

In the chart above, you can see that I have put together a bar graph of the performance of the major market indices for the first quarter.

Gold was the big winner for the quarter (although as the quarter came to a close it was sliding) while Emerging Markets were the loser (their under-performance from 2013 continued).

You might also note that bonds significantly outperformed stocks during the three month period.

The S&P 500 Index was just above break-even for the quarter, but below I’ve added two additional graphs to provide some granularity that I find interesting.

This first one subdivides the S&P 500 into various categories:
> S&P 500 (the index itself),
> S&P 100 (the largest 100 companies in the index)
> The Institutional Index (the companies most-owned by institutional investors like mutual funds and hedge funds)
> The Technical Leaders Index (the companies with the strongest technical performance as favored by momentum investors)
> The NASDAQ Index (for comparative purposes)
> Russell 1000 Growth Index (1000 largest Growth Stocks)
> Russell 1000 Value Index (1000 largest Value Stocks)


The big winner in the first quarter were Value Stocks followed by the Momentum Stocks – an interesting dichotomy since they are at opposite ends of the spectrum.

What I find fascinating is that the Institutional Index barely registers on this graph. Could it be because Apple was a loser during 1Q14, down nearly 4%, and it is the second most widely held institutional investment?


What is the most widely held? GM down nearly 14%


Lets take a look at the pertinent sector returns to see if that tells us anything:


This graph is cherry picked to give you a better idea about what is happening in the market. I included the SOX (semi-conductor index) which instead of the technology index to help demonstrate why the value stocks and momentum stocks led the way in 1Q14. You can see that the SOX and the Utilities (the ultimate Value Stocks) were both up huge during the quarter.

As we move through the second quarter, we will potentially continue to see a shift away from the widely owned companies to those less widely owned as investors search for return. The market leaders of 2013 and early 2014 have faltered in a big way (below I have five charts of stocks that Jim Cramer talks a lot about on CNBC as momentum leaders):






Each of these charts has at least one thing in common: late February/early March was a turning point for the momentum names. After that time, they headed south in return and only in the past couple of days have they started to move higher again. It is unknown if they will move back to their previous highs or if this move higher in the past few days is just a reaction low that is drawing in buyers ahead of a continuation lower.

As far as our strategy goes, we continue to hold our positions in companies with strong earnings growth and reasonable valuations, not yet ready to raise cash. The indicators we follow are not flashing signs of any major downturn around the corner – that said, we could easily have a pullback like we saw in February based upon investor skitishness and the fact that the market has moved so far so fast over the past five years.

The undervalued areas of the market have begun to move higher. In particular, the emerging markets have begun to recover and move toward break-even on the year as investors look for better valuations than those we have in the developed markets:


For now, we will continue to execute our current strategy, adding to holdings – particularly in Growth Stocks – that have moved lower in sympathy with the momentum names. But we are not ready to raise cash in anticipation of some major move lower – the indicators just do not show that anything funky is afoot at this time.