This week was a bit nasty, with the leading and smaller cap
stocks (Nasdaq and IWM) taking heavy losses continuing the month long decline
that started in early March. Larger (safer) stocks are doing much better
although most are still not profitable, just staying flat for the same time
period.
This rotation to larger companies is fairly normal when declines
occur or when fear that a larger decline is mounting, because the large players
move their money from riskier positions to more defensive positions. This
week as an example, we saw the BioTech companies get hammered while utility and
telecom companies did quite well.
I have commented on this defensive rotation in the
past. Many times it is a precursor to an impending larger drop in the
near future. Mutual funds and most hedge funds are unable to move their
assets out of the market even if they wanted to. They are literally
forced to stay invested by their charter, which means that their investors are
unfortunately not protected during large drops in the market. So, to
minimize the negative impact, they try to find safer alternatives in the market
or high dividend paying investments that tend to weather corrections
better. These ‘safer investments’ still drop when markets correct, but
their declines are usually less extreme or the dividends paid help offset the
capital loss that occurs. I actually spent some time on this interesting
phenomenon in my upcoming book, entitled “Buy and Hold Hope” due
out in just a few months.
You probably have noticed our accounts over the past two
weeks have been slowly lowering their exposure in the market, moving more and
more assets into cash. Both “the One” and our medium term strategy have
exited completely, with the longer term strategy still invested fully. I
always find it interesting when the different strategies start moving in step,
verifying in a sense the need to be cautious right now.
It is interesting to note that the S&P has experienced
very little loss from the high made earlier this month, in fact it is less than
1% off the top, yet the Nasdaq has fallen over 5%. All of the indexes
have basically made no money year to date. With the Dow, Nasdaq and
Russell 2000 in negative territory and the NYSE and S&P500 barely putting
in a profit (less than 0.5%). In fact most stocks have made little money
since before thanksgiving last year, moving sideways instead. This
sideways movement (or consolidation) isn’t abnormal after such a strong rise in
2013 and in fact is healthy. Granted, if money doesn’t start moving in to
the market soon, it can imply a larger decline is coming. So far, things
are holding up and the current decline is mooted.
Regardless of the outcome, we will continue to monitor and
protect your accounts. Hope you have a wonderful and safe weekend.
Respectfully,
Randall Mauro
Resnn Investments, LLC
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