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Market Trading Range-Is there Opportunity?
TW Advisors – March 2016
A big question has been answered early in 2016. Would a few momentum stocks rescue the market or would these high-flying stocks crack? Investors have heard the cracking sound loud and clear. Technology, where most of the highly-valued momentum stocks reside, was the big loser. Through early February Amazon was down -29%, LinkedIn had plummeted by -51%, Netflix off by -27% and Tesla had cratered by -39% just to name a few. Investors were defensive and putting their money into perceived safety –the Utility sector is up over 6% though the early February malaise.
The bull market that began in early 2009 reached full valuation in 2015 at the same time the Federal Reserve (FED) started to take the punch bowl away by ending quantitative easing and raising interest rates in December. Since 2009 there have been several pullbacks in the bull session but none yet classified as bear markets, at least as far as the popular indices are concerned. 2011 was a significant decline nearing 20% until a rescue by an injection of FED stimulus. The current decline as measured by most common market indices has fallen less than 15%, but the damage internally in some areas is much higher. The biggest damage has occurred to the energy and commodity sectors. However, small stocks, equal-weighted indices, and international stocks have retreated well over 20% and are looking attractive.
However, market action is still cautioning us to move slowly since the correction may not be over. Stocks have rallied since the February lows but with weak earning on the horizon volatility may pick up during the upcoming earnings season.
Attractive Areas of the Market
While value stocks in general have started to outperform, the banking sector has been very weak this year, not just in the U.S. but globally as well. This action is not a good sign and could be signaling more fragility in the world economy than is currently expected.
Due to the rally in the market we have reduced some exposure to stocks. Any rise from this level is not likely to be sustainable which appears to be supported by the lower trading volumes seen on the advance. We expect volatility to continue and for markets to test lower levels, but more importantly, provide investors good opportunities for long-term appreciation once the correction has run its course.
We are more active in our stock research currently than we’ve been in a long time and expect to gradually add high-quality stocks to the portfolios. Please contact us if you have any questions. Best wishes.