INSIGHTS

On March 24, 2014

Viewpoints from AAM - Range-Bound Dow Reflects Change in Psychology

Heightened volatility in a limited trading range often smacks of distributional behavior, the antithesis of accumulation. For the better part of the last six weeks, the DJIA has exhibited shifting technical characteristics which demand a watchful eye. I do not believe the DJIA’s expansive trading swings are a harbinger of a defeated uptrend for blue chips. But, it is evident that important changes may be afoot. Consider that since the early February general market correction several of the market’s broader indices, including the S&P 500 and Russell 3000, have soared to all-time highs while the blue chip index has languished in a narrowing trading channel. This top-down appraisal is reinforced by our bottom-up market observations leading us to conclude that the relative strength of mega-cap stocks versus medium and small capitalization stocks is becoming more clearly delineated. The development of this performance divergence coincides with the advancing stages of this market cycle. Historically there has been a sharpened focus on earnings growth prospects in the latter stages of a market cycle. Investor psychology is changing. Whereas, value stocks were sought after for their consistent earnings growth as well as for their attractive dividends, investors now seem willing to migrate toward the lower capitalization tiers of the market where the more leveraged and cyclical earnings growth opportunities could reside.

Here is another supporting factor that the market’s focus is evolving: since the first quarter of 2013, the Russell 3000 Growth Total Return has outstripped the Russell 3000 Value Total Return by nearly 500 basis points, with most of the divergence occurring since this past February’s correction. There is a virtually unmistakable turn in the road that may prove to be the onramp to accelerated upward momentum in stocks that are perceived to have the most alluring earnings results relative to Wall Street analysts’ forecasts. This focused buying could intensify and become concentrated among a narrowing roster of stocks as investor confidence blooms and the urgency to capture short-term opportunities quickens. If the last two cycles are any indication, it is quite possible that the market will sport faster and more expansive price movements in the months ahead. This, in turn, could find the broader market indices hastening through ascending technical mileposts. For the most part, the market's advance from its March 2009 bottom has been orderly. I am not predicting a buying stampede - not just yet anyway. But, I do anticipate a more growth-focused market environment that is likely to champion the more aggressive nature of medium and small-cap stocks rather than reward those perched primarily in the ‘safe haven’ blue chips.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at www.aamlive.com/blog/about/disclosures. For additional commentary or financial resources, please visit www.aamlive.com