Big
was good, small was bad last week. Again. The Dow Jones Industrial Average, a
narrow band of 30 megacaps, rose 0.4% and finished at a new all-time high on
Friday. Broad stock market indexes lost some ground in an up-and-down week.
In
particular, the stock market continued its 10-week rotation away from more
speculative Internet stocks and small-caps, which fell, and toward more stable,
large-capitalization stocks, which rose.
The
Dow rose nearly 71 points to 16,583.34. The Standard & Poor’s 500 index,
however, fell three points to 1878.48. The Nasdaq Composite index lost 1.3%, or
52 points, to 4071.87. Moving down the size continuum, the Russell 2000
small-cap index fell 2% last week, to 1107.22, with the tech sector down 3.5%.
Stocks
like Groupon (ticker: GRPN) and Twitter (TWTR) fell 14% and
17%, respectively. The Global X Social Media Index ETF (SOCL) of such
stocks is down 25% since the end of February. Now that the market is into its
fifth month of 2014, it’s safe to conclude it probably won’t be like last year.
The market’s behavior and psychology has moved into a new cycle, says Michael
Yoshikami, CEO of Destination Wealth Management. When the market senses a new
opportunity, such as the social-media space last year, but doesn’t know who the
winners will be, all stocks tend to go up together in frenzied activity, he
says.
That’s
followed by a period of separating the wheat from the chaff, as results come
out quarter after quarter and the market starts to make distinctions about, for
example, who is going to monetize their social-media assets, he adds. Twitter’s
first-quarter results, for example, disappointed earlier this month. It’s going
to be a “Dow world” this year, he asserts, “as investors are now
buying companies based on valuations rather than hope.” The rotation is healthier
for the market, he adds.
Layered
over this internal stock market rotation is a U.S. economy that’s viewed as
“could be better, could be worse,” says Paul Nolte, a portfolio
manager with Kingsview Asset Management in Chicago. Part of the hesitation
derives from investors wanting to see how the U.S. economy really fares
“once the IV drip” of the Federal Reserve’s quantitative-easing
program ends later this year.
For
now, all investors have seen is market stasis, with the S&P 500 index up
just 1.6% in 2014, compared with 14% at the same time last year and 30% for all
of 2013. It’s possible that the broad market will remain flat or even rise a
bit this year while that rotation continues underneath.
Investors
didn’t have to parse much in the way of directional macroeconomic data last
week, and the first-quarter earnings season is close to winding down. With some
453 companies reporting so far, earnings per share for the S&P 50 index is
on track to be up 5.9% in the first quarter, according to RBC Capital Markets.
May
is already here, and veteran investors know that we are approaching a
traditionally weak seasonal summer period for stocks.
(Source: Barrons Online).