Indicator of the Week: Big-Caps Outperforming this Year
By Rocky White, Senior Quantitative Analyst
Foreword: The major stock market indexes -- including the Dow Jones Industrial Average (DJI - 14,547.51), the S&P 500 Index (SPX - 1,555.25), and the Nasdaq Composite (COMP - 3,206.06) -- are all positive this year. Typically, small-cap companies are more volatile than larger-cap companies. Therefore, when the market moves higher, it is typically the small-cap indexes that lead. However, this year, it's the Dow -- comprised of large-cap stocks -- that is leading the way. This week, I take a look back at the last 30 years to see how these indexes have done against one other, and what it means going forward.
Rest-of-Year Returns: Looking back over the past 30 years, I found the returns on the three indexes mentioned above through the middle of April. Then I tracked the returns of the indexes for the rest of the year. The two tables below show how each of the indexes do when the Dow is beating the other two indexes (like this year) and when it is trailing both indexes.
The tables show that in the past, it has not been great for markets for the Dow to lead through this point in the year. When that happens, the Dow and S&P 500 average a negative return, while the Nasdaq averages a respectable 5.14% return. In the 11 years that the Dow leads, the indexes have been higher 55% of the time. Compare that to when the Dow underperforms the other two indexes. In that case, all three indexes average double-digit returns for the rest of the year. The Dow was positive every single year after such occurrences, and the S&P 500 was positive 10 of 11 times.
I mentioned earlier that whether the market is higher or lower it's not as common for the biggest change to come from the biggest companies. However, that is what has happened so far this year. Below is a table showing the three times that all three indexes were higher and the Dow had the highest return of them all. The first column shows how the Dow did through mid-April. Two of the three years, the markets took off and ended the year significantly higher. The last time it happened, just two years ago in 2011, the Dow was basically flat for the rest of the year, while the other two indexes fell slightly. Since the current Dow return is between the returns for 1996 and 1999, as seen in the table below, hopefully the returns for the rest of the year resemble those years (rather than 2011).
This Week's Key Events: Apple Earnings and the Advance First-Quarter GDP
Schaeffer's Editorial Staff
Here is a brief list of some key market events scheduled for the upcoming week. All earnings dates listed below are tentative and subject to change. Please check with each company's respective website for official reporting dates.
And now a sector of note...
The overlooked airline sector has piqued our contrarian interest, as skepticism seems unreasonably heavy on this outperforming group. The NYSE Arca Airline Index (XAL) is up 24.9% year-to-date, easily besting a gain of 9% for the S&P 500 Index (SPX). XAL recently bounced from a test of its 40-day moving average, which has served as a key layer of support since the second half of 2012. Despite this positive price action, Wall Street's attitude toward airline stocks is downright grim. Currently, all of the 21 stocks we track under the "aerospace/airlines" umbrella are trading above their respective 200-day moving averages, yet only 58% of analyst ratings on the group are "buys" -- down from 61% a year ago. Meanwhile, short interest on the group has increased by 8.7% over the past year, and these stocks now carry an average short-to-float ratio of 5.6%. As airlines continue to soar on the charts, a gradual shift in sentiment toward the bullish end of the spectrum could provide steady tailwinds.
Prepare for the investing week ahead. Every week, Bernie Schaeffer and his staff provide you with their insight about what has happened and, more importantly, what will happen in the market. We dig deep and show you what's happening behind the scenes, and tell you which indicators are predicting major market moves. If you enjoyed this week's edition of Monday Morning Outlook, sign up here for free weekly delivery straight to your inbox.
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