 |
 |
A
View of the Market, From 30,000 Feet Above |
|
|
The
last several days have been un-nerving to say the least. We closed out
July with a major selloff that ended up spilling into the first couple
of days in August. Then as quickly as the sellers started doing their business
in mid-July, the buyers appeared to take the helm again on August 6th –
with
a massive buyback.
 Having
already seen what we believe was a capitulation (as we described in our
last newsletter – click
here), we suggested the possibility of a recovery effort being just
around the corner. The strength we say the first three days of this week
supported the idea. Then we got a day like Thursday, where a large pullback
wipes away most of the recent gains. it’s enough to make you dizzy.
The Micro Cap
Press research staff still maintains the stance that stocks are most likely
to rise up and out of this turmoil. The rebounds in March of this year
and July of last year took a couple of weeks and made false starts before
finally resurfacing. So far, this dip largely mirrors those. As such, we
expect this one to play out like those two did, and eventually end in a
bullish manner.
The operative
word, though, was turmoil. In cases where minor blips turn into something
major (like now), sometimes the wise thing to do is wait for the dust to
settle, and look for bigger-picture backdrops. That may not be today though
- as of the time this is being written on Friday, the market still seems
to be stumbling. However, once all the volatility is shaken out, you'll
want to be well-equipped to capitalize on any rebound.
So while our
editorials are typically geared towards taking advantage of micro-cap opportunities,
today we’ve prepared a look at the equity market from 30,000 feet above…so
to speak.
Though all stocks
tend to generally move in unison, disparities between one style over another
- or one market cap over another - provide an opportunity to enhance
investor returns. That disparity became particularly wide in the first
half of 2007, and we believe the latter half of 2007 will offer comparable
opportunities…..though not necessarily using the same pockets of strength.
On the nearby
table, we’ve cited the short-term and longer-term (YTD) returns for all
the major market caps and styles. In terms of style, the winner is clear
– growth, in all sizes. While value historically outperforms growth, recent
market dynamics have been ideal for growth stocks. And though ‘things change’
all the time, our research indicates growth names are still apt to lead
the way until something more significant than just a strong selloff is
seen. As for size, the somewhat-obscure mid-cap category’s growth names
have been the big winners, while small-cap value has been stuck at the
bottom of the totem pole. We expect growth to continue dominating value,
yet we also think we may be due for some shifts in the capitalization ranks.
Coming On
Strong: Small Cap Growth. This group ranked second in the YTD and three-month
categories, and third in the one-month column. But, the more we look at
these stocks (and the chart of the S&P 600 Growth Index), the more
we like their persistence.
Runner Up:
Large Cap Growth. These names have pretty much held their second or
third position for the whole year, including during the recent corrective
move. It’s the economic environment we’re in prodding these stocks more
than anything else, but the environment isn’t likely to change soon.
Next To Last:
Mid Cap Value. They’re already there, and we see nothing that’s going
to change that soon.
Still At
The Bottom: Small Cap Value. We’ll issue the caveat first, since it’s
the most important message here……these stocks will eventually turn
higher, and when they do we expect a major upside move. So, be ready.
The same goes for mid cap value. That being said, we don’t see any evidence
of that happening just yet. There continue to be noteworthy exceptions
though. .
Ever heard the
disclaimer ‘Past performance does not guarantee future results’? While
growth stocks’ leadership over value may be sustained, we don’t inherently
believe leading and lagging sectors will hold their relative position.
In fact, we expect a handful of changes for the latter part of the year.
Take a look
at the nearby table. Energy is the top dog, with basic materials right
behind. On the other end of the spectrum, financials can’t get a break,
while consumer discretionary stocks don’t have much to brag about either.
All of that’s history though. What might the future hold? Our ongoing analysis
looks at every sector individually, but we don’t have room for all of those
thoughts today. Instead, we'll hit the highlights.
Potential
Upside Surprise: Utilities. They haven’t had a great year overall,
but look closely at more recent results - they’re gaining (though doing
it very quietly). A lot of investors may not realize this sector was one
of the very best last year, and they appear to be working on reclaiming
a seat near the head of the class. Yet, once again, nobody seems to see
it coming.
Likely Laggard:
Financials. In this case, the numbers speak for themselves. If you
saw a sector chart, you might also say the chart spoke for itself.
The Party’s
Over: Energy. Don’t misunderstand our opinion about energy stocks.
These stocks can and still may provide very nice results going forward.
However, we doubt they'll be able to generate the enormous gains we all
got used to over the last couple of years. It’s more about expectation
management.
Finally Getting
Traction: Technology. After lagging for most of the bull market, technology
stocks are finally starting to work their way ahead of the pack. Much like
the utility sector though, investors don’t seem to have taken much notice
yet. We believe that’s the root of the opportunity.
As stated above,
these are longer-term views. There’s still some sorting out that needs
to be done in the short-term. Traders may find some nice swings in the
volatility, while investors could use the time to find some of the very
big bargains created by the havoc.
We hope our
sector, style, and market cap ideas help you establish your own framework,
but keep in mind nothing is set in stone. In other words, the themes, trends,
and rotations discussed here are just our opinion, and should be regarded
as such. Plus, the underpinnings we used as our basis can change without
warning. Deeper due diligence and close monitoring are always prudent .
|
Updated: 9:18 am PST (17:18 GMT), January 5, 2009
