The Markets This Week

May 13th, 2014

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)

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