Glamour Stocks Get Hammered – Implications For The Big Picture

Guest Post By Dr Van Tharp  of the Trading Education Institute

Here in the Delaware, spring is finally(!) upon us. Easter has gloriously come and gone. Spring flowers are still beautiful. The trees are tentatively colored green as leaves appear (they’re covered in green, I tell you, not white!). Yeah, it’s been a long snow-filled winter. And to be honest, this paragraph would have probably been easier to write if it weren’t 49 stinking degrees outside (that’s 9.4 Celsius to the rest of the world…).

And with the changing of the seasons, the stock market has seen drastic “changing of the guard”. The glamour stocks (mostly in tech) that led the charge during last year’s huge up move for the broad U.S. stock indexes have done an abrupt “about face” with many of them just flat jumping off a cliff. Let’s look at what’s happened with those once (and future?) high-flyers, what stocks have taken their place at the top of the leader board and the implications for the markets moving forward.

First, the Broader Market Continues to Impress

We’ll get to those glamour stocks in a moment. But the S&P 500 itself was basically a glamour stock in 2013, putting on one of its best performances of the past century. NYU’s Stern School of Business maintains a database of annual performance for the S&P 500 dating back to 1928. Using their data, I sorted for the top performing years and found that 2013 ranked as the 11th best total return performance (price appreciation plus dividends) out of the past 86 years. For reference, below is a table of the top 15 years based on total return:

 

The market can’t have a monster year like that without having some heavy hitters leading the way. The glamour stock list is tech-heavy and sounds like a CNBC headline producing machine: Google, Amazon, Priceline, Trip Advisor, Biogen Idec, Facebook, Tesla, LinkedIn and Twitter to name just a few. Not all are in the S&P 500 (most are), but they were certainly among the most talked about stocks of 2013. With gains from 60% to 297%, these stocks captured the imagination (and the cash) of the public and institutional investors. What a difference a couple of months make.

The Great Rotation

For some of these high-profile stocks Amazon AMZN, Twitter TWTR, Linkedin LNKD, the top came in January or earlier. But for the rest, the big migration started right around the first of March. And the air has come out of these bubbles quickly. Since the market close on 12/31/13, the S&P 500 has managed a 1.65% gain. But the glamour stocks have been whacked and whacked hard. The more robust symbols like Google GOOG have only dropped 16%, but Priceline PCLN (-20%), Biogen BIIB (-24%), Tesla Motors TSLA (-26%) and Netflix NFLX (-29%) have been thrashed. And the IPO that could do no wrong has been dashed back to earth with TWTR dropping a whopping 47% from its all-time highs.

So what does this tell us about the markets?

Many bears are seeing blood in streets with the darlings of 2013 getting trashed over the last two months. But with the S&P up for the year, it is interesting to see which stocks (and sectors) have taken the glamour stock’s place at the top. Much like the early months of 2013, some non-traditional sectors are extending the market’s bull run. Sectors like utilities, energy, health care and consumer staples are once again leading the way. Blue chip names including Alcoa, Caterpillar, Merck, Southern Company and Johnson & Johnson are returning double digit gains for 2014 year-to-date.

A shift in mind-set has certainly occurred. The continued tapering from the Fed has taken market players from a full risk-on decision process of “chase all high-flyers” to a guarded “stay invested, but choose defensive names that won’t get hurt as badly during a pullback” posture.

If the market can weather the beating that has bruised the glamour names and survive what most believe to be another $10B per month paring of QE on Wednesday afternoon, then this bull market could put together a last-gasp blow off top. Then those beaten-down glamour names may start to look like bargains and we could get one more rotation before this year’s correction hits.