The moment of truth has arrived for momentum stocks, which have been slammed over the last several weeks. The selling has been exacerbated by geopolitical risk between Russia and Ukraine, but ultimately it looks like the air is being deflated from many overbought names. Social media stocks, online retail companies, and biotechnology names are some of the hardest-hit areas that should warrant the most caution.
Last year the mantra was all about chasing momentum and getting in on the fastest-moving areas to keep up with the crowd. Even historically innovative companies such as Apple Inc.
(NASDAQ:AAPL) were relegated to "old school" status by such highfliers as Amazon
(NASDAQ:AMZN), Tesla Motors
(NASDAQ:TSLA), and SolarCity
Now we're seeing the bottom fall out of these stocks, and money is being redeployed to safe havens such as utilities, consumer staples, and even Apple once again. Companies with big profits, healthy dividends, and low volatility are back en vogue. The major difference between the market today and what we experienced in 2013 is the wide divergence between leaders and laggards.
Last year you could throw a dart at the Wall Street Journal
and more than likely make money. Nearly every sector was trending higher; the only difference was that some were running faster than others.
This year, despite the relatively flat total return of the SPDR S&P 500 ETF Trust
(NYSEARCA:SPY), the sector divergences have been intense. The clear winner has been the Utilities SPDR ETF
(NYSEARCA:XLU), which has gained 14.68% in 2014.
On the flip side, the worst performer has been the Consumer Discretionary SPDR ETF
(NYSEARCA:XLY), which has lost 4.82% and is now testing its 200-day moving average once again. A spike below this key level may lead to another wave of selling that pulls the rest of the market down with it.
This defensive shift has many investors worried about the negative implications of additional volatility this summer that could send the major indices back below their long-term trend lines. From a seasonal standpoint, we're now exiting the strong growth months and entering a historically lackluster period.
The one thing that the market has working for it is that selling has been relatively limited to a few key areas that have already experienced double-digit declines. The Global X Social Media ETF
(NASDAQ:SOCL) is in bear market territory, and the iShares Nasdaq Biotechnology Index ETF
(NASDAQ:IBB) is flirting with similar weakness.
If we do see stabilization in those areas as a result of value-seeking growth investors looking to redeploy capital, it could be an all-clear sign that sends the markets even higher.
One of the best strategies this year has been to simply be cautious with a healthy dose of low-volatility stocks, fixed income, and even cash on hand to take advantage of new opportunities. I believe this theme will continue for the foreseeable future, and as such, you should be flexible with your asset allocation to control risks. Patience and discipline will be rewarded with additional tactical themes as a result of shifting trends that you can use to your advantage.
Read more from David Fabian, Managing Partner at FMD Capital Management:
3 Unique Multisector Income Strategies
Chasing Strength Versus Buying Weakness
VIDEO: April 2014 Chart Review
No positions in stocks mentioned.