High beta names in the market have been bashed to bits over the past few weeks. Tesla (TSLA), Priceline (PCLN), Wynn Resorts (WYNN), Gilead Sciences (GILD), Netflix (NFLX), Baidu (BIDU), NetApp (NTAP), and more have seen mini bear markets. The NASDAQ Composite itself has produced a short-term top and is currently testing support of this trend. Is the worst behind us for now? I think so.
Most of the selling I think is profit-taking that began before the Crimean annexation referendum. Investors continue to debate the valuation of the market, selling stocks that have run up in growth areas and they’ve begun looking at value areas and stocks that didn’t participate in the market rise of 2013 — like materials, energy, and big tech.
The correction looks overdone to me on a short-term basis. Whether we rally and form a possible long-term top is a possibility if old highs fail to be breached, but thus far, I don’t see any reason why that may be possible. Consider the trend in the NASDAQ Composite itself. We were at new highs a few weeks ago, right along trend. The correction has taken the index down to trend support. Everything looks normal except for the underperformance of the index versus the S&P 500. That’s a new turn of events and one to watch.
Also note the percentage of stocks above the 50-day moving average within the NASDAQ Composite indicating we are near an oversold zone for this trend.
So, as I’ve mentioned many times before, rotation is the name of the game. Where’s the money being invested? Two areas: global growth and value. The global recovery story has been building since the beginning of the year, but it took a major step forward last week when China announced plans to invest in urbanization again (story). The price tag for it: .75 trillion dollars or 42 trillion yuan (story). That’s why cement, steel, manufacturing equipment, and other infrastructure plays have been on the move despite the dismal housing numbers in the U.S. as of late.
Why is value outperforming? If you just sold something that has risen 40 percent or more over the past year, where do you look to reinvest? Individuals want to stay in stocks but they want to be in areas that look cheap because they didn’t rise 30 to 40 percent last year. “Old” technology names and energy services look to be forming or completing bottom price patterns. I mentioned last week on the radio show that land rig usage has seen a trend reversal. The Baker Hughes Rig Count shows that year over year comparisons look favorable as the rig count reached a low this time last year while current trends are rising for land rigs. Baker Hughes believes the active rig count is a leading indicator for products used in drilling, completing, producing, and processing hydrocarbons. In managing the energy portfolio at PFS Group, this gets my inner financial-geek going.
Land Rig Count
Source: Baker Hughes
On the other side of the asset class pond, bonds haven’t broken out and continue to consolidate after last year’s route; however, iShares Barclays 20+ Year Treasury Bond Fund (TLT) broke out today from a long-term bottom pattern — which I think is ridiculous. When the Federal Reserve removes buying pressure and we’re nearing the end of the winter slowdown (more on this later), it’s ridiculous to see bond prices this high, but it also points to the mixed feelings investors must be having on the economy and stocks. ETF’s breaking out ahead of the individual securities tells me it’s retail investors doing the buying and small money managers - not big money. Small managers move in ETFs and mutual funds while big managers buy the actual bonds. Also, note the breakout in TLT was not confirmed by volume. Never-the-less, bonds will be staying on my radar as credit markets are typically smarter than equity markets when it comes to economic sensitivity. The divergence between stocks and bonds, and now bonds and bond ETFs will need to be corrected one way or the other.
Are TLT investors listening to the correction in momentum stocks, or the economy? I think it’s the former because recent economic results have been phenomenal and possibly the first signs of something special for Q2. Recall that Q1 has been plagued by two things: inventory reduction and harsh winter conditions. We continue to see that companies are getting out of jail for free as long as they blame whether for their earnings misses in Q1. As we all know, the economy will bounce back when conditions improve as history repeats itself when consumption is put on hold temporarily due to weather, and then pent up demand is released thereafter.
Recent economic activity is showing very positive signs that the worst is probably behind us and we should expect the economy to catch up. The Philly Fed Survey last week bounced back after February’s quick dip into the contractionary zone and is at levels we saw heading into the winter, leaping from -6.3 to 9. This week’s Kansas City Fed also showed strong results touching a level of 10, the best this series has seen in a year. Both indicators showed strong results in the new orders department which is a leading indicator. Chris Puplava showed yesterday that the Philadelphia Fed’s State Leading Economic Index showed that all 50 states are expecting improvement for their economies over the next six months (story).
Conclusion
The correction in momentum and growth areas looks overdone for the time being. I’m seeing volume enter into the area this week at key support levels which indicates weak hands are leaving and strong hands are entering. The NASDAQ Composite is near support and one would expect a short-term bounce here at the very minimum. The rotation out of growth into value is of concern, in addition to the strong performance already this year in healthcare and utilities — defensive sectors. Seeing materials, energy, and manufacturing and mining stocks put in long-term bottoms is an encouraging sign that some investors still believe in economically-sensitive areas. These areas have been leveraged to China in the past and with the announcement of another large urbanization project, a catalyst may finally be here for China stocks and commodities to shine.
