Stability is the name of the game right now in equity markets – something that can be seen in the daily moves in various speculative sectors and how investors react to outside influences like Russia and Ukraine (really, the primary factor motivating the more wild ups and downs in the stock market at this point). Signs that the tensions may be thawing – and we’ve seen this movie before – contributed to a rebound in the Nasdaq and other indexes later in the day to leave the tech-heavy index basically unchanged on the session.
But that didn’t help the biotech stocks, and the cloud names like Workday and Salesforce.com (now riding a four-day losing streak), and the sharp declines in these names is something that the folks at Bespoke Investment Group suggest is a phenomena that newer investors haven’t seen before. That is, when stocks just keep falling, and it shows that the break in momentum in these names hasn’t been arrested. “It’s rare for a market to become that information-insensitive (in either direction), so this has been a great learning opportunity for traders that haven’t seen a similar sort of move,” they wrote. It also gives lie to the idea that this was a tax-related selling issue. While those stocks have tended to pop up with the market – and this morning’s jump in futures shows that investors really do have Ukraine close at hand even if the effect is a third-order one – but any jump in the Nasdaq has been a selling opportunity for those names.
Meanwhile, the bigger tech names like Microsoft and IBM ended higher, and investors kept plowing money into utilities and telecom names like the boring AT&T (snooze) or Verizon (snore). As Bespoke puts it: “Our thesis is that
the rotation is hunting stability, and that traders are willing to bid up predictable long term cash flows, with
less emphasis on whether those cash flows are “rich” (high P/E) or “cheap” (low P/E),” they said.
Either way it helps continue a run of outperformance the large-caps have managed against the small-caps in recent history. Mike O’Rourke of JonesTrading notes that just 32 percent of speculative positions in the Russell 2000 are long right now, a sharp drop from 59 percent in early March – yet still higher than the average 25 percent from 2007-2011, suggesting if things get worse, more people could bet against the Russell. (The small-cap Russell has had a notable run, in that it’s about 350 days into a stretch of not closing below its 200-day moving average, a sign of long-term strength. Could this break be on the way? More knee-jerk selling would get us there.)
While growth isn’t entirely being discarded, the stocks with more of their price tied up in future expectations are being shed, and taking other ones with it, like Amazon, a two-time participant in momentum stock moves, which was hammered again on Monday.