This week was a bit nasty, with the leading and smaller cap stocks (Nasdaq and IWM) taking heavy losses continuing the month long decline that started in early March. Larger (safer) stocks are doing much better although most are still not profitable, just staying flat for the same time period.
This rotation to larger companies is fairly normal when declines occur or when fear that a larger decline is mounting, because the large players move their money from riskier positions to more defensive positions. This week as an example, we saw the BioTech companies get hammered while utility and telecom companies did quite well.
I have commented on this defensive rotation in the past. Many times it is a precursor to an impending larger drop in the near future. Mutual funds and most hedge funds are unable to move their assets out of the market even if they wanted to. They are literally forced to stay invested by their charter, which means that their investors are unfortunately not protected during large drops in the market. So, to minimize the negative impact, they try to find safer alternatives in the market or high dividend paying investments that tend to weather corrections better. These ‘safer investments’ still drop when markets correct, but their declines are usually less extreme or the dividends paid help offset the capital loss that occurs. I actually spent some time on this interesting phenomenon in my upcoming book, entitled “Buy and
Hold Hope” due out in just a few months.
You probably have noticed our accounts over the past two weeks have been slowly lowering their exposure in the market, moving more and more assets into cash. Both “the One” and our medium term strategy have exited completely, with the longer term strategy still invested fully. I always find it interesting when the different strategies start moving in step, verifying in a sense the need to be cautious right now.
It is interesting to note that the S&P has experienced very little loss from the high made earlier this month, in fact it is less than 1% off the top, yet the Nasdaq has fallen over 5%. All of the indexes have basically made no money year to date. With the Dow, Nasdaq and Russell 2000 in negative territory and the NYSE and S&P500 barely putting in a profit (less than 0.5%). In fact most stocks have made little money since before thanksgiving last year, moving sideways instead. This sideways movement (or consolidation) isn’t abnormal after such a strong rise in 2013 and in fact is healthy. Granted, if money doesn’t start moving in to the market soon, it can imply a larger decline is coming. So far, things are holding up and the current decline is mooted.
Regardless of the outcome, we will continue to monitor and protect your accounts. Hope you have a wonderful and safe weekend.
Resnn Investments, LLC