Market Pulse: Stocks are strong, but not that strong
Last week was a good representation of stock activity in 2014. Stocks advanced … well, sort of.
The S&P 500 rose 1.2 percent, the Nasdaq Composite was flat and the Russell 2000 fell 1.2 percent. The large-cap stocks as measured by the S&P 500 were far stronger than the small-cap stocks that comprise the Russell 2000 index. That’s been the theme all year.
Here’s another example of large-cap stock strength: In 2014 both the S&P 500 and Dow Jones Industrial Average, measures of large-cap stocks, are only 0.8 percent off their recent highs.
The S&P Mid-Cap index is down 1.8 percent from its high and the S&P Small-Cap index is 6.3 percent off its high. Emerging markets were strong but now they, too, are more than six percent off their high.
With the S&P 500 leading the market higher, few funds are outperforming. Hedge fund managers, which are expected to outperform, are panicking.
The market’s narrow activity will be reflected in your statements as well. If your portfolio is up more than the S&P 500 then you have invested extremely well.
More likely are modest year-to-date portfolio gains. Unfortunately, those who favor small-cap stocks may have losses.
Having the large well-known stocks show strength at the same time that the rest of the market falters serves as a warning flag.
That’s the type of activity that occurs prior to most major market tops. When the S&P 500 reached a high at the March 2000, fully 60 percent of the broad market stocks were 20 percent or more off their highs.
At the 2007 high, 28 percent of stocks had already fallen 20 percent or more.
For the bulls, it is important that the broader market stocks perform better. For investors, the message is clear: own large-cap stocks, especially those that pay consistent dividends.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.ETFportfolios.net or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.