Goofy Internal Rotation

Equities start the day lower as we continue to undergo some kind of goofy internal rotation. At one point growth stocks were as loved as Ned Stark, now they appear to be as hated as Joffrey Baratheon. Take a look at this colorful chart I whipped up this morning showing 5 growth names vs the S&P (normalized at 100). As you can see, the S&P has gone sideways since the beginning of March while former high flyers like Splunk and Fireeye and Yelp have thrown up all over themselves. My boy Dan Strumpf over at the WSJ pointed out that dividend stocks appear to be back in vogue here. The question we are all wondering is why….why have growth stocks turned into a trap for investors? My inclination is that the market is saying to us “I’m done paying up for growth at any price, I believe I will be able to find attractive returns in things like financials and old school large caps like MSFT instead.” Fortunately for us this rotation out of high flyers hasn’t affected major indices all that much. Even with 30 / 40 / 50% drawdowns from the highs we have a market that is +1% YTD (Nasdaq -1% YTD). That’s not bad, usually when high beta gets whacked it has bleed over effects everywhere and we just haven’t seen that yet. So as we enter another earnings season the primary concern on everyone’s minds is 1) will Joffrey finally die this season? 2) is the growth stock meltdown the start of something more serious? 3) is HBO’s new series Silicon Valley going to make me mad that I didn’t major in Computer Science? 4) has the bull market finally run out of steam? 5) will CNBC ever stop talking about HFT / rigged markets? and 6) did Michael really need 3 weeks off from writing recaps ? (yes)

After the open it was another ugly day where everything was bathed in red, kind of like the Hound in a KFC. No economic data or earnings so the tone was a follow thru from Friday. Names that haven’t touched their 200 days in YEARS not only touched them, but actually breached them (MA / V to name a few). I just find it weird that the market isn’t down way more than this. Just an ugly rotation, a bit like my jumpshot. You know what though? Unless you were chasing growth like mad for the past 6-12 months you probably don’t even care what’s going on right now. Names like IBM, MSFT, JPM, and DIS are all near their highs not giving a rip about 700x PE stock implosions. Anyway, the entire first half of the day was lower and by lunch we had landed on 1,848, down 0.9%. Winners: ALXN / HCP / VTR / K / INTC. Losers: TRIP / GNW / ADS / MU / KMX. Staples and Utilities led, Materials and Disc lagged. Exactly what you’d expect.

The afternoon saw the market pick itself up and dust itself off because it was WAY oversold but it wasn’t enough, a vicious final long sword slash closed us at 1,845, down 1%. So yea, growth stocks are basically a movie theater filled with 200 people, one exit, and a fire. That process is still playing out and no one knows what that’s going to do to overall risk appetites. It hasn’t affected them dramatically YET…but this selling could ramp up. Oh one final thing of note (thanks to my friend David): once earnings kick in companies go into their quiet periods for buybacks, which means we lose that underlying bid. Yikes.

Final Score: Dow -102bps, S&P500 -108bps, Nasdaq -1.1%, Rus2k -1.5%.

News Highlights:


We’ll end tonight with a Jeb Corliss video. A guy hurtling thru space in between mountains set to a cool track. Just what the doctor ordered!

Have a good night