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Rolling Correction

index-comparison-ytd
Year-To-Date Major Indices

I wanted to show you what was happening with the stock market and the easiest was to do it is to give you several comparative bar charts so you can easily compare. The one above shows you the major indices on a Year-To-Date basis. Small Cap, Growth Stocks, and Emerging Market stocks have been big losers YTD, but Value stocks and Foreign Developed Markets have helped been winners.

However, if we look at things on a month-by-month basis, you can see that we have a market in transition:

index-comparison-january

The bar chart above is for the month of January and you can see that everything was down across the board.

Now lets look at February:

index-comparison-february

Everything was up in February, with Small Caps leading the way.

Look at March:

index-comparison-march

In March, Value Stocks and Emerging Markets took the lead.

April to date again tells us a different story:

index-comparison-april-so-far

Small Cap stocks, Growth stocks and Emerging Markets were crushed this month, while even Value was down a bit.

This sort of trendless market is indicative of a rolling correction where certain categories of stocks are the big winners one month then they are the big losers the next month.

If we look at the economic sectors, you will see an unhealthy market. Lets look at the sectors year-to-date:

sector-comparison-ytd

You can see that Utilities are the big winner on a year-to-date basis – that does not bode well for the year since they make up about 3% of the entire market. The biggest sectors, Technology, Financials, and Health Care have two of the three in the negative (and the most important part of the Health Care sector for Growth-style portfolios, BioTech is negative in a substantial way this year).

Lets look at the sectors on a monthly basis. First January:

sector-comparison-january

January was an ugly month, but BioTechs were the clear leader and pulled all of the Health Care sector positive.

For February:

sector-comparison-february

February was a wildly positive month (as we saw in the bar chart for the major indices above) and it is important to note that BioTech led the way again in February.

For March:

sector-comparison-march

We have an entirely new scenario playing out beginning in March. BioTech (and the other high growth economic subsectors) all began to under-perform the less growth oriented areas of the market.

For April To Date:

sector-comparison-april-so-far

April has been fairly cruel to the areas of the market that should be leading: BioTech continues to be crushed taking the entire Health Care sector down, Financials are down big, and Technology is off even more. The correction in the high growth sectors is rolling down to the traditional growth sectors, causing investors to move to the more defensive areas of the market: Utilities and Consumer Staples. Energy is up for the month, but that may have as much to do with the Ukraine/Russia situation than anything else.

The point of this blog post is to show you the turmoil under the surface – the S&P 500 Index may be hovering around breakeven on a Year-To-Date basis, but the parts of the market that should be leading us if we were in a cyclical bull market are breaking down in a big way.

Investors have begun to sell everything other than the traditional defensive stocks and we are having a slow bleed lower. Its just not a fun nor profitable market at the moment. However, with interest rates as low as they are and corporate profits still growing, albeit very slowly, this situation will work itself out.

The market simply moved too far last year by increasing its P/E ratio and earnings did not keep pace – so this year is one where that overvaluation has to be rectified before we continue to move higher. The high growth stocks moved higher last year than the rest which is why they are the ones moving lower than the rest this year.

The rolling correction will probably continue as investors look for a place to hide until valuations have settled into a normalized zone.

Mark