Archive for May, 2014

Switchin’ To Growth

Tuesday, May 20th, 2014
NASDAQ Relative to S&P 500

NASDAQ Relative to S&P 500

We don’t do a lot of relativity charts here on the blog, but I thought the easiest way to demonstrate how the NASDAQ has performed vis-a-vis the S&P 500 over the past 20 years was to draw a chart for you that shows just that.

The chart above basically plots the price of the NASDAQ Composite Index against the price of the S&P 500 Index. When the chart is rising, that means the NASDAQ is outperforming the S&P 500 – but when the chart is falling the S&P 500 is outperforming the NASDAQ.

As you look at the chart above, you can see the craziness of the late 1990’s NASDAQ stock market bubble and its fall back to earth in that big mountain higher. However, since the drop, its easy to spot that the trend has been for the NASDAQ to outperform the S&P 500.

Now, lets look at small cap stocks compared to large cap stocks:

Russell 2000 compared to S&P 100 Index

Russell 2000 compared to S&P 100 Index

This graph compares the Russell 2000 Index of small cap stocks to the S&P 100 Index of the 100 largest US companies. Again, when the graph is moving higher, the small cap index is outperforming the large cap index – and vice versa when its falling.

You can see that as we moved through the 1990’s, small cap stocks underperformed their large cap counterparts, but since the crash, small cap stocks have been steady outperformers for the past 14 years.

However, over the past six weeks, we have seen the S&P 500 outperform the NASDAQ and large caps outperform small caps. The question that concerns me is this: are we at the point in the market where the growth stocks that dominate the NASDAQ and small cap indices are going to again underperform their large cap bretheren or is this just part of the normal cycling between growth and value that has occurred over the past 14 years within the greater uptrend.

Lets check out the past six weeks in each of these charts and see if that can give us some clue as to what is happening now:

NASDAQ V S&P 500 past six weeks

NASDAQ V S&P 500 past six weeks

The graph above shows us how the NASDAQ has performed over the past six weeks relative to the S&P 500. You can see it appears that the NASDAQ underperformance has bottomed and it has started to move higher. On this graph you will note that at the bottom I’ve added the Money Flow Index and you can see that it has moved decisively from 15 to above 50 – meaning that investors have started to shift their buying from S&P 500 stocks to NASDAQ stocks to pick up bargains generated by the NASDAQ sell-off relative to the S&P 500.

Russell 2000 V S&P 100 - past six weeks

Russell 2000 V S&P 100 - past six weeks

The graph above shows you how small cap stocks have performed relative to large caps over the past six weeks. You can see that visually, it does not appear that small caps have bottomed yet in performance compared to large caps. So, I have added the True Strength Index at the bottom to help us sort through the price movements. In looking at the True Strength Index, you can see that the black line has crossed above the red line, meaning that small caps are in the process of bottoming in terms of performance vis-a-vis large caps (even though it is too hard to spot just looking at the price chart).

Based upon these admittedly recent signs – signs which could change in an instant – it looks to me as if the Growth side of the investment world has started to recover and that the uptrends in NASDAQ and Small Caps are in tact.

Investors appear to be switching their investment dollars into Growth once again. This is important for a couple of the investment strategies we manage for clients.

Our Growth Strategy relies heavily on companies that dominate the NASDAQ – technology, biotech, and small/mid cap companies whose earnings are growing much faster than the broader market and who rely much less on debt as part of their capitalization structure. Over the long term, as you can see from the graph above, we anticipate that it will outperform a S&P 500-style portfolio. However, there are times when things move in cycles with larger trends and the past six weeks has been one of those times.

Our Core Strategy is a more balanced strategy that includes a bias toward growth with a balancing of S&P 500 companies to help smooth the cyclical movements with the larger trends.

Our Blue Chip Strategy focuses solely on the S&P 500 style value companies with strong or improving balance sheets that the market has undervalued and which have shareholder friendly dividend policies. These Blue Chip companies have outperformed the broader market the past couple of years as investors have moved to the safety of steady – even if slower growing – earnings and safe dividends.

Our Dividend Income Strategy focuses on companies with shareholder friendly dividend policies who distribute a significant portion of their net income to their shareholders since they do not operate in high growth industries.

Any of these strategies can be appropriate for individual investors, depending upon their objectives and risk tolerances. By discussing with our investment management professionals your goals for the assets we manage, we are able to tailor a portfolio that is right for you – from high growth to high income.

As the market cycles, one strategy may outperform another, but each one will achieve our clients individual objectives. It is our job to manage the portfolios during the cycles, adding to growth and small cap stocks when they under-perform just as we add to large cap stocks when they under-perform.

It is all part of the portfolio management process.

Mark