Major averages rose weakly Friday on lower volume, reversing some of the gains made earlier in the day. Biotechs and internets had been leading groups up until recently when both groups experienced their worst setbacks in more than 2 years. Money has seemed to rotate into energy, commodities, and financials instead of leaving the market outright, but this movement has defensive flavor to it. International stocks and super-cap stocks have also bucked the downtrend as money flows into these sectors, moving away from high-P/E highflyers and into low-P/E, old-line big-cap names. With weakness in high beta leading stocks, money seeks safe haven in what is perceived to be more stable, less volatile areas of the market. Thus the Dow Jones Industrials and S&P 500 are only off a percent or so compared to the NASDAQ Composite and Russell 2000 which are off 4-5%.
The largest concern is that when leading groups get hit hard, that usually has a negative eventual impact on the rest of the market. Thus, in non-QE markets, further downside would be expected. But QE is the wildcard and has provided a floor for the markets since January 2013, so major averages could indeed come off another few percent but then find a QE floor.
Not surprisingly, CANSLIM type stocks have lagged major indices such as the S&P 500 since quantitative easing began in 2009: http://www.northcoastam.com/. This is testament to why markets can change, and why our pocket pivots and buyable gap ups are superior methods, and not just since 2009, but in numerous prior market cycles as well.
Today is the last trading day of the first quarter and futures are up strongly, continuing a pattern that we saw most of last week when the market gapped-up several times only to churn and stall, closing mid-range or below. Most leading stocks are down deep in their patterns after suffering severe selling pressure over the past 2-3 weeks, so a reaction rally is always a possibility. In our view investors should stand clear of the long side until more concrete set-ups present themselves.