Record S&P 500 Momentum Unwinding as China Quashes Euphoria
After U.S. stocks gained 30 percent last year and almost everything went up, measures of Standard & Poor’s 500 Index price momentum are slipping just as concern mounts that emerging markets will snuff out the rally.
Almost 160 companies in the benchmark gauge for American equities traded below their average level over the past 200 days last week, more than any time last year, when stocks posted the biggest rally since the technology bubble, according to data compiled by Bloomberg. A total of 86 stocks set one-year highs as the index hit a record Jan. 15. That’s down from an average of 112 when peaks were reached in the third quarter.
Weakness in the indicators watched by technical analysts is a sign the investor euphoria is waning after 460 companies in the S&P 500 climbed in 2013, according to Bank of America Corp. While slowing momentum has sometimes been bullish when valuations shrink, Thornburg Investment Management Inc.’s Jason Brady says investors should prepare for more months like January, when equities tumbled as manufacturing growth in China slowed.
“You have to have new reasons for prices to go up,” Brady, a money manager at Thornburg who helps oversee $95 billion, said in a Jan. 28 phone interview from Santa Fe, New Mexico. “Maybe there’s no longer these reasons.”
Reduced Federal Reserve bond-buying, political crises from Thailand to Turkey and disappointing earnings reports at Apple Inc. and General Electric Co. have sent the S&P 500 down 4.1 percent in 2014, the worst start to a year since 2009. Gains that went uninterrupted for almost a year have prompted warnings from investors such as Blackstone Group LP’s Byron Wien and Nuveen Investment Inc.’s Robert Doll Jr., who say the S&P 500 is due for its first 10 percent drop since 2011.
The index fell 2.3 percent to 1,741.89 at 4 p.m. New York time today in the biggest daily drop since June.
Fewer stocks are pushing the market higher when it rallies. On days when the S&P 500 has advanced, about two stocks have climbed for each that fell during the last seven months, according to data compiled by Bloomberg. That’s down from a ratio of 2.5 for the rest of the bull market.
“It’s one more piece of weight on the scale suggesting caution,” Brad McMillan, chief investment officer for Waltham, Massachusetts-based Commonwealth Financial Network, said in a Jan. 30 phone interview. While last year’s market powered forward, this year the progress is more delicate, he said.
“Would you rather be riding in a tank with tracks or on a unicycle?,” said McMillion, whose firm has more than $71 billion under management. “If you’re in a tank, you’re probably not going to tip over, or at least it’s going to take a heck of a lot more than if you’re on a unicycle.”
GameStop Corp. (GME) has had the second-worst performance of S&P 500 stocks in 2014 after it was among the 20 best in 2013. The Grapevine, Texas-based video-game retailer cut its earnings forecast on Jan. 14 because of lower-than-expected sales of games and reduced profit margins. The shares traded at 17.9 times profit in October, the highest since 2008. GameStop’s valuation tumbled to 10.7 last week after the stock fell below its 200-day moving average earlier in January.
Johnson & Johnson (JNJ), based in New Brunswick, New Jersey, dropped 3.4 percent this year, slipping below its average the past 200 days on Jan. 29, after rallying 31 percent in 2013. The world’s biggest maker of health-care products forecast last month that 2014 earnings would be lower than analysts’ estimates. Annual profits haven’t expanded more than 10 percent since 2008, data compiled by Bloomberg show.
Shares of El Segundo, California-based Mattel Inc. (MAT), which traded at 19.2 times earnings in July, lost 20 percent so far this year. At $37.84, the stock is 14 percent below the 200-day moving average. Earnings growth for the world’s largest toymaker, which was sued last month by MGA Entertainment Inc. for trade-secret theft, will slow to 7 percent next year after an 11 percent gain in 2014, data compiled by Bloomberg show.
“Investors are becoming more selective and favoring companies most likely, in their minds, to have meaningful growth in earnings this year,” said John Carey, a fund manager at Pioneer Investment Management Inc., a Boston-based firm that manages about $220 billion worldwide. “This year will see a more typical market, one with some rougher swings in price.”
Average daily moves in the S&P 500 have increased to 0.61 percent, compared with 0.44 percent in December, data compiled by Bloomberg show. The Chicago Board Options Exchange’s Volatility Index, known as the VIX (VIX), reached 18.41 last week, the highest level since October.
Slowing momentum should be expected in a bull market entering its sixth year and after the S&P 500 surged 30 percent in 2013, according to Wells Capital Management’s James Paulsen. The index has rallied 163 percent since March 9, 2009, and hasn’t posted a 5 percent drop since May. Fewer companies pushing the market higher means investors are acting with more discretion, not turning bearish, he said.
“It’s not that surprising that we’d see the broadness diminish,” Paulsen, the Minneapolis-based chief investment strategist at Wells Capital, which oversees about $359 billion in assets, said in a Jan. 30 phone interview. “It doesn’t mean anything’s necessarily changed. It argues that the market’s behaving more rationally. To me, this looks more like a refreshing pause than a correction.”
Rallies in shares of smaller companies, banks and transportation stocks have been bullish signs in the past. During the four biggest bull markets of the last quarter century, peaks in those categories have come before the S&P 500 reached its highest level almost 90 percent of the time, data compiled by Bloomberg show.
The Russell 2000 Index (RTY) of companies with an average market value of about $1 billion reached an all-time high of 1,1181.29 on Jan. 22. The S&P 500 Financials Index climbed last month to the highest point since September 2008. An index of transportation stocks reached a record Jan. 23.
While consumer spending rose more than forecast and the unemployment rate has fallen to a five-year low, the central bank is removing stimulus from the economy at a time when it is still expanding at a below-average pace. The Fed said Jan. 29 that it will buy $65 billion a month in bonds, down another $10 billion.
Gross domestic product increased 3.2 percent in the fourth quarter, matching the median forecast, according to Commerce Department figures last week. The economy will grow 2.8 percent this year and 3 percent next year, compared with the average of 3.3 percent since 1948, according to the economist estimates compiled by Bloomberg.
“People have become used to markets going up all the time,” Christopher Wolfe, chief investment officer at Bank of America Merrill Lynch’s private banking and investment group, said in a Jan. 29 phone interview. His firm manages $1.9 trillion in client balances. “We haven’t had a correction in quite some time and there’s definitely ripeness for that, but there are fundamental issues as well.”
About 59 percent of New York Stock Exchange-listed companies traded below their 200-day moving averages on Jan. 29, compared with more than 80 percent above in May 2013, data compiled by Bloomberg show. When that proportion falls below 60 percent, investors should read it as a negative signal, Bank of America wrote in a Jan. 27 note.
It slipped below 60 percent in April 1998, about three months before the S&P 500 plunged 19 percent. In 2007, the percentage of NYSE-listed stocks trading above their averages fell from 65 percent to less than 30 percent in a matter of weeks. The S&P 500 lost 57 percent from October of that year through March 2009, data compiled by Bloomberg show.
“The breadth has been deteriorating,” Jeff Saut, the St. Petersburg, Florida-based chief investment strategist at Raymond James, said in a Jan. 30 phone interview. His firm oversee about $400 billion. “The equity market has had a heart attack. I don’t think the S&P has found a short-term to intermediate-term bottom.”
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