Uncategorized, Weekly Update

Fuel for the Next Leg of the Rally

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Published May 3, 2019


Recent headlines tell us the “stock market” has returned to record high levels. We put that in quotes because closer observers of the broader universe of stocks will tell you that it’s predominantly the larger companies whose stocks have moved higher. The indexes of midcap and smallcap companies remain well below their highs of last September. The index of even smaller “microcap” companies is almost a full -20% behind the performance of larger companies, having traded flat for the past 10 weeks while large company stocks marched ever-higher.

midcap, smallcap and microcap companies remain well below large cap companies.

One could argue this unwillingness of investors to take the risk of buying smaller companies is consistent with the market’s overall appearance. As we’ve noted in prior weeks, it is surprising that bonds and defensive stock market sectors continue to attract so many buyers even as the stock market moves upward. Bonds have been on a one way trek higher since November.

Bonds have been on a one way trek higher since November.

While defensive low-volatility stocks (shown below in blue) have notably outperformed the S&P 500 (shown below in red):

Defensive low-volatility stocks have notably outperformed the S&P 500

These moves with bonds and smaller stocks are typically not a sign of a strong stock market.

Were smaller, riskier stocks to find strength, it would be a real boost to the market’s rally effort as there is clearly some “wall of worry” built into this market.

Market Update

A strong jobs report turned around what was a losing week for the stock market. A tame inflation report Monday kept stocks near record territory with indexes posting a +0.1% lift. A weak earnings report from Google parent Alphabet (GOOGL) kept stocks flat Tuesday to bring a successful month of April to a close. While GOOGL tumbled -7% on the report, stocks in a wide range of earnings reporting companies fared well, with McDonalds, Pfizer, Merck, and Mastercard all performing well. Investors opened the month of May in a selling mood. The S&P 500 slipped -0.8% as the Fed dampened hopes for a rate cut. Market participants have hoped that the tame inflation might lead to a reduction in short-term rates. The slightly negative tone bled over into Thursday with stocks touching lower again -0.2%. The negative result for the week was reversed, however, in Friday’s trade. The aforementioned strong jobs report combined with news of an investment by Warren Buffet’s Berkshire-Hathaway (BRK.B) in Amazon (AMZN) to give stocks a positive jolt. The retail heavyweight rose +3% on the news. The market’s gains were broad-based with strong participation in all sectors and market indexes, perhaps leading the way toward overcoming the headwinds facing smaller company stocks we mention in this week’s blog.

The stock market moved to record highs for the S&P 500 and Nasdaq 100 indexes with the S&P (SPY) gaining +0.21% and getting mid-week support at the 2900 level, a good sign for the bulls. The Nasdaq 100 (QQQ) added +0.24% to post the index’s 8th straight weekly win. The QQQ has only posted slight losing weeks twice in the past 19 weekly tallies, an amazingly strong run from the pre-Christmas lows. The smallcap Russell 2000 (IWM) reversed what had been a losing week in a strong Friday showing to finish the week with a solid breakout amid a +1.43% rise.

Warm wishes and until next week.