Archive for April, 2014

Rolling Correction

Monday, April 28th, 2014

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:


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:


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

Look at March:


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

April to date again tells us a different story:


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:


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:


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

For 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:


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:


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.


First Quarter Wrap-Up

Tuesday, April 1st, 2014

Click on any image for a full size view

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.