The small caps are sick.
|Dow||+154.19 to 17,210.06|
|S&P 500||+15.53 to 1,998.30|
|Nasdaq||+46.53 to 4,555.22|
|10-YR Yield||+.034 to 2.569%|
|Gold||-$4.50 to $1,217.50|
|Crude Oil||+$1.52 to $93.07|
The Russell 2000 index of smaller capitalization stocks has plunged more than 60 points so far this month. It’s off almost 100 points from its twin peaks in March and July. In fact, the RUT is now DOWN 3 percent for 2014.
Compare that to the Standard & Poor’s 500 Index. It just hit a fresh all-time high around 2,020 last week. While it pulled back on Monday and Tuesday, it’s still UP almost 9 percent for 2014 as a whole. Many of the sectors and stocks I’ve highlighted — rails, steel, MLPs and so on — have done even better.
Just look at this chart, which shows the divergence in performance between the RUT and the S&P 500 and you can see what I mean. The gulf is wide and getting wider!
If you watch CNBC at all during the trading day — or read as many financial news stories or blogs as I do — then you’ve probably also seen, heard or read about the “Death Cross.” The term refers to the crossing of the 50-day moving average down through the 200-day MA. That just happened in the RUT for the first time since summer 2011. If you recall, stocks collapsed shortly thereafter amid the debt ceiling debacle.
|“What’s causing small caps to lag so badly?”|
But if you go back further, you see a similar signal in July 2010. Stocks headed a bit lower … but two months later the RUT was rallying again. It ran from around 640 at the time of the “Death Cross” to around 870 the following spring.
Another cross occurred in the summer of 2006. Stocks bottomed a few weeks later, and the RUT surged from around 708 all the way to 858 the following summer.
So sure, the death cross CAN signal further problems ahead. But it doesn’t always.
The bigger question is, what’s causing small caps to lag so badly?
Is it fears the U.S. economic recovery is faltering?
Worries about the durability of the improvements in the auto, energy, and manufacturing sectors?
Concerns about lousy data in Europe and China, and the ramifications for U.S. companies that sell into those markets?
Or is it the realization that the U.S. Federal Reserve is getting closer to the date it raises interest rates?
I’ve read all kinds of explanations. The ones about Europe and interest rates make the most sense to me. The euro currency continues to trade like death warmed over — just as I predicted it would.
You can see here it just knifed through 1.28 against the dollar here. If last-ditch support at my second, lower blue line doesn’t hold, it could ultimately tank to 1.20 or lower!
We’re also seeing the price of Eurodollar futures start to roll over. As you may recall from previous columns, those futures contracts track expectations about the future direction of short-term interest rates (the ones most closely controlled by the Fed). That signals increasing market concern over sooner-than-expected Fed hikes.
Personally, I wouldn’t panic just yet. We’ve seen several other corrections and consolidations over the past few years … and they’ve always led to higher prices. But I’m always vigilant about the possibility of something worse, so I will be watching closely and let you know if conditions change.
[Editor’s note: As a bonus to this column, we have a podcast by Bill Hall in which he reveals the primary factor influencing your portfolio’s return. Turn up your speakers and click here now to listen.]
How about you? Are you finding that your stocks aren’t keeping up with the major market averages? How have small caps treated you? Do you think there’s opportunity here in Russell-style, domestically focused equities? Or is this Death Cross signal something you should really take to heart? Let me know by commenting below.
|Our Readers Speak|
Once again, there’s a lot going on over at the website — with discussions on everything from ISIS to gold and oil to food production and health raging.
With regards to the Middle East conflicts, Reader Michael said: “I will not be surprised if gold, oil and such will go up, but I did not understand why General Dynamics (GD, Weiss Ratings: B+), Boeing (BA, Weiss Ratings: A-), Harris (HRS, Weiss Ratings: A) and other military producing companies went down, while we know that during military conflicts demand for their production and so profit should go up.”
Reader Bruce S. added: “The world seems to be wanting to be at war over religion and oil. Surely the prices cannot continue to decrease with possible supplies so iffy and with Russia likely to curtail gas exports.
“It appears to me some of the oil and pipeline stock yields are such that it is unlikely one would lose much. I am going to buy slowly based on dividend yield and possible appreciation.”
Thanks for the input, guys. I think oil has a very bright long-term future for a number of reasons, with domestic drilling, transportation, and storage firms particularly well-positioned. So MLPs and related firms look like wise long-term investments to me.
As for the defense contractors, many of them have commercial aviation divisions as well. Concerns over the pace of global growth have put a temporary lid on many of the aerospace stocks. But I believe the multi-year upgrade cycle is still on target there.
Meanwhile, a handful of you suggested the anti-GM, pro-organic eating trend has its own downsides. Reader Louie said: “Organics is a farce! Nutritional scientists have consistently noted that organic products have no more nutritional value — and sometimes less — than products produced by conventional means.
“By increasing production, GMOs help starving people survive without the use of pesticides, which they can’t afford anyway. As for me, I’m not going to throw my money away on ‘organic’ just to be in the social main stream, or deprive people of healthy food just because its productive capacity has been improved by scientific engineering.”
So what do you think? Is Louie right? Or are scientific “advancements” in the food industry more harmful than beneficial? Weigh in at the comment section below.
|Other Developments of the Day|
- Bombs continue to fall across Syria and Iraq as part of the U.S.-led campaign against ISIS. Reports suggest targets were hit west of Baghdad, near the Iraqi-Syrian border, and near the Kobane border town adjacent to Turkey.
- Apple (AAPL, Weiss Ratings: A-) has bent under the threat of competition from the likes of Samsung. But it hasn’t broken. The same is apparently true of its new iPhone 6 Plus! Reports suggest the phone is susceptible to bending in pants pockets given its aluminum frame.
- Existing home sales were a disappointment last month. But new home sales weren’t. They surged 18 percent in August to a seasonally adjusted annual rate of 504,000. That was the highest since May 2008, and the biggest one-month increase in almost 23 years.
- The giant bond management firm PIMCO has had a rough go of it lately. Executive departures. Massive fund withdrawals tied to underperformance. And now, the Securities and Exchange Commission is investigating whether the firm mis-valued bonds to make the performance of one of its ETFs look better, according to the Wall Street Journal.
Reminder: You can let me know what you think by putting your comments below.
Until next time,