When looking at the gyrations of the stock market indexes every day, it appears stocks are simply gaining one day and giving it all back the next. It would be easy to miss the sea change occurring right before our eyes.
Most readers are aware that the biotech sector, along with most new age technology areas, like 3D printing or cloud stocks, has been in the throes of a severe sell-off for over two months. If you review their technical charts, as I have, just about all of them look like death warmed over. Obviously, growth stocks are out and value is in. Those who have bucked that trend and attempted to pick the bottom in these groups have gotten their head handed to them.
However, utility, consumer durable, energy and other old economy sectors have risen as investors took profits in new age equities and invested the proceeds in these "low-beta" stocks. Unfortunately for the overall market, that trend is not a good sign. It says that more and more investors are becoming cautious the closer we get to record highs.
One may have noticed, for example, that as the technology-heavy NASDAQ index, along with both the small and mid-cap Russell Indexes, have been declining steadily, the Dow hit record highs last week.
If you look under the hood, you will find the explanation. Only one security of the top 12 most heavily-weighted stocks (all low-beta, defensive names) in the S&P 500 is exhibiting weakness. Over on the Dow Jones Industrial Average, most stocks that make up that average pay dividends and are also thought to be more defensive than the overall market. In essence, big money investors, especially professional players who have to be invested in equities, are hiding in these defensive areas. They are hoping that if the markets roll over, these stocks will get hurt less than the overall market.
Unfortunately, historical data tells us that even these stocks will ultimately succumb to selling pressure. It just takes a bit longer before the large, big cap value names follow the other indexes lower. The S&P is now in its 10th week of this process, which is the longest it has exhibited this behavior since 1994. The intra-day volatility is also increasing. Consider just one example. On Friday the NASDAQ rallied 0.80% in the first half hour of trading and then declined 0.50% before 10:45 AM. The other averages are also experiencing these kinds of wild swings. Not good.
As for quarterly earnings, 736 US companies reported this week, and they have averaged a decline of 2.09% on their report days. The average stock that beat EPS estimates has gone up a mere 0.18% on its report day. But the average stock that has missed EPS this week has fallen 5.33% on its report day. Not good.
Given everything that is occurring in the stock market, I remain cautious and expect further volatility with a higher risk of downside in the weeks ahead.
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management.