Yet again … Not much has changed our cautious outlook since last week’s alert. The Nasdaq and Small Cap Russell 2000 spent the week in a decline losing roughly 1.5% for the week, while the S&P500 and Dow went basically sideways with no gain.
We continue to have a very unique situation in the market where the smaller more growth-oriented stocks are feeling the effects of a correction down roughly 10% for the year, while the larger companies have basically not declined at all and are sitting close to multi-year highs.
Most of the action now is in defensive stocks and the energy sector, which are not the type of stocks that generally lead a sustained rally. The fact that quality growth stocks are doing badly says a lot. Companies like Twitter, AOL, Groupon, Zullily, FireEye, Whole Foods are all down more than 20% in the last two days from missing their earnings expectation, where normally the impact from an earnings miss would be less severe.
Many full-time investors are starting to compare this bifurcated market to what we saw in 2007. Although I personally can’t imagine that we will have another 2008 in the near future; larger corrections certainly do start this way … with growth oriented stocks going into a decline months before the larger stocks even show a hint of a decline. Small corrections generally happen quicker … they don’t take as long to setup, and the market generally moves more in step with all companies equally taking a hit at the same time. Whereas larger corrections usually take longer to start since the large institutional investors are slowly moving their money from riskier smaller companies to larger safer ones. This process can take months to complete.
Bottom line, for now … watching from the sidelines is the most prudent behavior. As you already know, all of our strategies moved fully to cash over a month ago, so we have nothing to worry about if the market continues down. We will continue to monitor the situation very closely and if things improve we’ll quickly be back in the market.
Hope you have a wonderful and safe weekend.
Resnn Investments, LLC