What Are The New Market Leaders (Now That Growth Is Damaged)?

Posted by Bigtrends on April 16, 2014 6:43 AM

What Are The New Market Leaders (Now That Growth Is Damaged)?
Can a bull run without growth leaders?

by Kevin Marder

The heavy damage absorbed by most of the speculative growth-stock glamour stocks was further rubbed in late last week, with last Thursday in particular being the worst Nasdaq Composite (COMP) session in 29 months.
Volatility continues to rise, a plus as it holds the potential to flush out additional sellers and create a selling climax.

Nasdaq Composite Daily Chart
nas comp mw 1 d

Chart created using TradeStation 

As mentioned recently, the true test of a market lies in the character of a rally following a correction in the averages, especially its breadth, volume and leadership.

The so-called easy money is generally made in the early phase of a bull, when central-bank interest-rate cuts usher in a more accommodative monetary policy. This is usually the first one or two years of a bull. Following two or three years of upward movement in the averages, and coincident with central-bank rate cuts, the market may still rise, but the advance tends to be more laborious. This occurs as the averages hit a series of new highs for the cycle, but each high is accompanied by fewer individual issues making highs. This is largely due to the prevalence of interest-rate-sensitive shares in the makeup of the broader market.

This decline in breadth, when measured by the cumulative New York Stock Exchange advance/decline line, has not been seen yet in this cycle. For this reason, and because interest-rate proxies such as the financial sector (XLF) (KIE), and bank (KRE) (KBE) and brokerage groups confirmed recent S&P 500 (SPX) (SPY) highs with highs of their own, precedent says that the S&P has not begun a new bear market.

Thus, the bull market has bought itself some time, perhaps months, before the inevitable divergences between S&P/breadth and S&P/interest-rate proxies become apparent and problematic.

The question in the minds of many a growth-stock speculator: Can this market continue its bull run without the glamours in attendance? And what about those glamours? Are they done for the bull market?

Precedent shows that a bull market is led by the growth sector less than half of the time. While a bull can move higher with leadership emanating from other areas - e.g. value/cyclical (1987) or defensive (1988-1990) - the gains are generally not of the magnitude of a growth-led market.

The view here is that the growth sector - defined here as issues with above-average, recession-resistant, earnings-growth rates - will not recover to the extent that the averages do in the next several months. This is based on historical precedent, which has shown growth to lead the market in the early, interest-rate driven phase of a bull.

As the central bank begins cutting rates, growth normally hands the leadership baton to value stocks.

Even then, however, there should be at least a few growth stocks that can lead shares higher.

In the meantime, energy (XLE), utility (XLU) and consumer staples (XLP) sectors are the prominent outperformers. One segment within energy that stands out from the typical value/cyclical fare is domestic oil and gas exploration issues (XOP) (OIH). These use hydraulic fracturing and horizontal-drilling techniques.

Among the names, one domestic oil and gas explorer showing excellent leadership is Clayton Williams Energy (CWEI). Most analysts on Wall Street who follow the stock eye earnings growth of 64% in 2014 and 29% in 2015. CWEI is a more speculative name by virtue of its smaller size (average daily dollar volume of $10.1 million).

At present, however, the stock is extended in price above its most recent area of support, and does not represent attractive entrance. As well, first-quarter earnings are expected out on April 24.

CWEI Daily Chart
cwei mw d 1

Chart created using MarketSmith

Steel Dynamics (STLD) produces a variety of steels, including flat-rolled, bar and rail, and also recycles scrap metals. According to the Street, STLD is forecast to grow earnings by 42% this year and 45% next year. Technically, while the stock shows one of the more constructive bases in the market, an attractive entrance is not present. STLD is under extreme accumulation, with the following chart showing some of the accumulation days. In the near-term, caution should be exercised in light of the company earnings release expected this week.

STLD Daily Chart
stld d mw

The averages remain in downtrends and former leading stocks have shown little interest in finding their sea legs. Bull markets have a tendency to favor growth titles during interest-rate-driven phases, while value shares most often lead during periods of rising rates. The current correction in the averages and the growth sector is believed to represent an adjustment to a rising-rate environment - not the end of the bull. If it represented the latter, the entire market would be coming down. This is not the case, as reflected by the NYSE advance/decline line, among other measures.

The long-only momentum player should continue to favor defense and a high cash position until attractive pattern setups emerge. As always, a premium is placed on an open-minded, flexible approach to new technical developments.


Courtesy of MarketWatch

 

BECOME A BIG TRENDS INSIDER! IT’S FREE!