“Mo” stumbled again. The once-popular momentum stocks continued their reversal last week, pressuring the broad market, which fell more than 2% in volatile trading.
As they have since late February, investors shed highly valued shares of mostly small and mid-sized biotech and social media companies, market leaders in 2013. Last week weakness spread to big “old” technology stocks considered safe havens such as Microsoft (ticker: MSFT), which fell 1.7%, to $39.21.
While first-quarter earnings released Friday from banking bellwether JPMorgan (JPM) were weaker than expected, and its stock fell 7.5%, there appears to be no discernible reason for the downdraft other than high valuations of stocks leading the retreat.
“There’s been a core of momentum stocks like Tesla Motors (TSLA) and others that nobody could find [satisfactory] valuation methods for,” says Scott Colyer, CEO of Advisors Asset Management. Without traditional value measures for these stocks, some investors began to balk, then it snowballed.
The Dow Jones Industrial Average fell 386 points, or 2.3%, to 16,026.75, and the Standard & Poor’s 500 index lost almost 50 points to 1815.69. The technology-heavy Nasdaq Composite index, plunged 3.1%, 128 points, to 3999.73. The small-cap Russell 2000 fell the most, down 3.6% to 1111.45.
It’s been 18 months since investors have experienced this kind of volatility, and many view the pain as a healthy corrective after a huge run-up. “I hope it gets ugly, but not too ugly,” adds Colyer, who thinks the market might test its 200-day moving average, down to about 1760 on the S&P 500.
Speaking of technical moves, one divergence that bears watching is the weekly number of individual stocks making new highs, which peaked at 925 on May 10, 2013, according to Ned Davis Research. Adds Frank Gretz, a technical analyst for Wellington Shields, that number dropped to 700 late last year and more recently close to 500, even as the broad stock market indexes continued to make new highs.
“It’s a bad sign,” Gretz notes, considering that in bull market history, the peak in the number of stocks making new highs comes roughly a year before the bull itself peaks. But there’s a divergence from the divergence: The stocks leading the bull market are usually the last ones to hang on. (Barrons Online).