/perspectives/weekly-viewpoint/tough-week-as-rotation-from-growth-to-value-contin

Tough Week as Rotation from Growth to Value Continues

The Dow Jones Industrial Average (Dow) fell 2.35%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.78%, the Standard & Poor’s 500® Index (S&P 500) declined by 2.65% and the NASDAQ Composite Index (NASDAQ) shed...

April 14, 2014    |    By Mike Schwager

Performance for Week Ending 4/11/14:

The Dow Jones Industrial Average (Dow) fell 2.35%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.78%, the Standard & Poor’s 500® Index (S&P 500) declined by 2.65% and the NASDAQ Composite Index (NASDAQ) shed 3.10%. Sector breadth was negative as 9 of the 10 S&P sector groups finishing lower.

 

Index* Closing Price 4/11/2014 Percentage Change for Week Ending 4/11/2014 Year-to-Date Percentage Change Through 4/11/2014

Dow

16026.75

-2.35%

-3.32%

Wilshire 5000

18911.85

-2.78%

-1.78%

S&P 500

1815.69

-2.65%

-1.77%

NASDAQ

3999.73

-3.10%

-4.23%

*See below for Index Definitions
 

MARKET OBSERVATIONS 4/7/14 - 4/11/14

The major market indices finished the week broadly lower reflecting a lackluster start to first quarter earnings season, concerns over the pace of economic growth in China, and rotation away from a group of high-flying momentum stocks.

Market action over the past couple weeks has shown a marked shift out of higher valuation stocks that had been the market darlings over the past several quarters into more conservatively valued areas of the market. In particular, stocks in the biotech and social media sectors of the market have been pummeled as many of these names trade at extremely high valuation levels and have little prospects of near term earnings generation. The beneficiaries of the rotation have been the more “defensive” areas like Utilities, Telecom and Consumer Staples which tend to sport cheaper valuation metrics and in many cases offer attractive dividend yields.

In light of the recent sell-off, you’d think the economic news was turning negative; however, that has not been the case. On Thursday, the Labor Department reported that weekly initial jobless claims fell to their lowest level since May 2007, providing more evidence the jobs market continues to improve. On Friday the University of Michigan Consumer Sentiment Index rose to the highest level since last July. The index was fueled by improved confidence about current economic conditions and economic outlook. Earlier in the week, the Labor Department reported that U.S. job openings reached a post-recession high in February. The Job Openings and Labor Turnover Survey (JOLTS) showed 4173k job openings in February, a 299k increase from January and above the consensus estimate of 4,020k. While the JOLTs report has typically gotten little fanfare, there is a growing interest in the data after Federal Reserve (Fed) Chairwoman Yellen mentioned that she pays close attention to the figures.

Elsewhere, the Conference Board reported that the Employment Trends Index—a basket of eight labor-market indicators—rose 0.4% in March to the highest level since February 2008. The Commerce Department reported that wholesale inventories increased by 0.5% in February, the eighth consecutive monthly gain. Lastly, the National Federation of Independent Business reported that small business optimism jumped 2.0 points to 93.4, the biggest gain in 9 months.

Capitulation-like characteristics were evident in the latter half of the week as traditional “fear fulcrums” appeared to be signaling growing levels of PANIC in the marketplace (these indicators also tend to be contrarian in nature): The CBOE Volatility Index (aka the fear index) finished the week at a 1-month high, the American Association of Individual Investors (AAII) reported that bullish sentiment has plunged to the lowest level since early February, and market breadth (advancing stocks versus declining stocks) has been heavily skewed toward decliners. While none of these indicators will necessarily prevent the market from going lower, capitulation has often been a precursor to near-term market troughs. Bottom-line: The economy continues to improve, the Fed is committed to low interest rates, and overall market valuation remains fair. This scenario, in my opinion, should ultimately prove to be supportive of the continuation of the bull market – stay tuned.

Earnings Season
Last week’s kick-off to first quarter earnings season offered little support to the market. Through Friday, 29 members of the S&P 500 have reported quarterly results with overall earnings down by 1.4% (ex the Financials sector earnings are up 2.0%). Of the 29 companies, 51.7% have beaten expectations while 31% have fallen short. The current “beat” rate sits well below the long-term average of 63%. For the quarter, analysts are expecting S&P 500 earnings to fall 0.9%, well below the expected 5.2% growth at the start of the year. While weather has played a major part in the sluggish first quarter growth, it’s still unclear whether investors will look beyond the much of a weather-related weakness and give stocks a “free pass” on the prospects for a rebound in second quarterly results. Forward guidance from company management will likely help determine how this scenario plays out.

Technicals
Technicals were also in focus last week after the S&P 500 pierced through its 50 day moving average (1843). The “50” is closely watched by the trading community and the violation may be an early sign of a near term shift in the market’s momentum. Since 2012, a break below the “50” has resulted in additional downside risk of approximately 4.3% before the market finally found its footing. Next support levels for the S&P are 1800 followed by 1760 (200 dma).

The Week Ahead
The economic calendar will be in focus during the upcoming holiday shortened week (Note – Markets will be closed on Friday in observance of Good Friday). Key reports include March retail sales, February business inventories, the March Consumer Price Index (CPI), the April Empire State Manufacturing Index, the April National Association of Home Builders Housing Market Index, March housing starts and building permits, industrial production and the April Philadelphia Fed Survey. Also of interest will be the release of the Federal Reserve’s Beige Book report on Wednesday. Quarterly earnings will begin to ramp up  with over 50 members of the S&P 500 scheduled to report results. Included in this group will be nine members of the Dow Jones Industrial Average. Fed Heads will be out and about during the week with 10 speeches on the docket including two by Fed Chair Yellen (Tuesday and Wednesday). Also note that federal and state income taxes are due on Tuesday.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm’s headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.



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