Looking Under the Hood

It’s been an unbelievably crazy, hectic and demanding last 6 months for me and the old voltmeter is telling me it’s time to recharge my batteries. So this will be my last post for a few weeks. I was going to just signoff this week but after doing my weekly check-in with those few trusted technicians I trust and follow, I felt compelled to leave you with a very thin slice of an excellent article “The 2014 Stealth Bear Market – A Transition or a Top?” written by Chris Puplava of financialsense.com.  He has some compelling statistics if you look under the hood of today’s market that confirmed what I believed was happening.  The market has a way of not only challenging even the most experienced but humbling us too.

Looking Under the Hood

While the small cap space is feeling the pain of this transition from high liquidity and low growth to higher growth and low liquidity, the Dow Jones Industrial Average and the S&P 500 aren’t showing the same level of volatility. While the Russell 2000 was down 4.4% through the third quarter, the Dow was up 4.6% and the large cap S&P 500 Index was up 8.3%; the NASDAQ as well was up 8.6% on a total return basis. However, the headline numbers don’t tell the full story for there is greater deterioration beneath the surface than what the major indexes performance numbers tell.

For example, the S&P 1500 is up 4.96% year-to-date (YTD) as of 10/23/2014 while the median stock in the index is down 0.15%. The NASDAQ Composite is up 6.61% YTD while the median stock within the 2557 member index is down 5.65%. The Russell 3000 comprises roughly 98% of the entire U.S. market capitalization and is up 4.55% YTD while of the 3000 members within the index the median stock is down 1.96%.

Looking at the figure above clearly shows that 2014 has been a rough year as the markets grapple with a less accommodative Fed and the prospect of rate hikes in the coming year on the back of an improved economy. Transitional years are difficult to navigate and the performance numbers from large cap active managers bear this out as nearly 85% of active managers are under-performing the S&P 500. Again, this comes down to stock picking and when the median stock is down 1.96% in the Russell 3000, while the index itself is up 4.55% YTD, beating your benchmark is hard to do.

This was made evident by a recent study done by The Leuthold Group in their October “Perception Express” in which they measured the percentage of stocks within the S&P 1500 beating the S&P 500 over a trailing 12-month basis. As of the end of Q3, only 30.2% of the 1500 stocks in the S&P 1500 were beating the performance of the S&P 500, indicating active managers had a 70% chance of under-performing the S&P 500; this was the worst reading since the technology bubble burst in 2000.

If you would like to read Chris’ entire article (which I would highly recommend) you can go here.

I look forward to seeing you back here in a few weeks fully recharged, enthusiastic and as always, ready to go.