5 Important Lessons for Nervous Bulls

Large-cap stocks have led the 2013 rally ... but is that good news?

by 4/20/2013 10:00:31 AM
Stocks quoted in this article:
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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.

Rest-of-Year Returns when the Dow Beats the SPX and COMP

 Rest-of-Year Returns when the Dow Trails the SPX and COMP

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).

Rest-of-Year Returns when the Dow Leads and All 3 Indexes are Positive

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.

Monday

  • The week begins on the economic front with existing home sales. Elsewhere, Caterpillar (CAT), Netflix (NFLX), Halliburton (HAL), Hasbro (HAS), Texas Instruments (TXN), Veeco Instruments (VECO), and Zions Bancorporation (ZION) are all slated to step up to the earnings confessional.

Tuesday

  • Housing and manufacturing will be on the economic radar on Tuesday, with the latest FHFA housing price index, new home sales, and the flash manufacturing PMI. Meanwhile, a number of notables are expected to report earnings, including Apple (AAPL), AT&T (T), DuPont (DD), Travelers Companies (TRV), United Technologies (UTX), AK Steel (AKS), Amgen (AMGN), Arch Coal (ACI), ARM Holdings (ARMH), Brinker International (EAT), Broadcom (BRCM), Cree (CREE), Delta Air Lines (DAL), Discover Financial Services (DFS), Juniper Networks (JNPR), Lockheed Martin (LMT), Norfolk Southern (NSC), Panera Bread (PNRA), Reynolds American (RAI), US Airways Group (LCC), VMware (VMW), Xerox (XRX), and Yum! Brands (YUM).

Wednesday

  • Wednesday's economic calendar features the MBA mortgage index, durable goods, and weekly crude inventories. Additionally, Wall Street will digest quarterly results from the likes of Boeing (BA), Procter & Gamble (PG), Ford Motor (F), Sprint Nextel (S), Zynga (ZNGA), AFLAC (AFL), Akamai Technologies (AKAM), Allegheny Technologies (ATI), Barrick Gold (ABX), Boyd Gaming (BYD), Cliffs Natural Resources (CLF), Corning (GLW), Eli Lilly (LLY), EMC (EMC), F5 Networks (FFIV), LSI Corporation (LSI), Motorola Solutions (MSI), O'Reilly Automotive (ORLY), Owens Corning (OC), Qualcomm (QCOM), Ryland Group (RYL), Southern Company (SO), SUPERVALU (SVU), Tractor Supply Company (TSCO), USG (USG), Virgin Media (VMED), Waste Management (WM), WellPoint (WLP), Western Digital (WDC), Whirlpool (WHR), and Xilinx (XLNX).

Thursday

  • Weekly jobless claims will be in focus today, as well as earnings reports from 3M (MMM), Exxon Mobil (XOM), Amazon.com (AMZN), PulteGroup (PHM), United Parcel Service (UPS), Alaska Air Group (ALK), Altera (ALTR), Altria Group (MO), Baidu (BIDU), Biogen Idec (BIIB), Boston Scientific (BSX), Bristol-Myers Squibb (BMY), Colgate Palmolive (CL), Cirrus Logic (CRUS), Coca-Cola Enterprises (CCE), Coinstar (CSTR), Deckers Outdoor (DECK), Dunkin Brands Group (DNKN), Expedia (EXPE), Harley-Davidson (HOG), JetBlue Airways (JBLU), Potash Corp./Saskatchewan (POT), Southwest Airlines (LUV), Starbucks (SBUX), TASER International (TASR), and Time Warner Cable (TWC), among many others.

Friday

  • We'll wrap up the week on Friday with the advance reading on first-quarter gross domestic product (GDP), as well as the Thomson Reuters/University of Michigan consumer sentiment index. Chevron (CVX), Alcatel Lucent (ALU), DR Horton (DHI), Goodyear Tire & Rubber (GT), and Weyerhaeuser (WY) are all scheduled to unveil earnings.

And now a sector of note...

Airlines
Bullish

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.

 Daily Chart of XAL since October 2012 With 40-Day Moving Average

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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