Review & Outlook

Our take on the investing, financial, & economic themes of the day

Small Caps, Technology and “Momentum” Stocks on the Rebound

25 June, 2014 by Ben O'Brien in Commentary

Back at the end of March and beginning of April the technology-heavy Nasdaq Composite index took a dive, falling for three consecutive weeks. Previously high-flying areas like internet, social media and biotech stocks got crushed along with small caps, while defensive sectors such as utilities and value-oriented stocks performed best. Many market watchers wondered if this was a long-awaited shift away from “momentum” stocks that have outperformed for more than five years as the market has rebounded from the financial crisis.

The correction, however, was short-lived. The Nasdaq and the Russell 2000 small cap index both rebounded strongly and are back in positive territory for the year. Below is the year-to-date chart of the Nasdaq.

Nas

 

The short-lived pullback shows the difficulty of timing the market. Even when there’s a big movement in the market as there was earlier this year, it’s very hard to tell whether it’s a brief correction or a long-term shift. The meddling of the Fed with its easy money policy makes the market even more difficult to predict than usual right now.

It is important to note, however, that that while most tech and “momentum” stocks rebounded sharply, the correction did provide a healthy wringing-out of some of the more overheated areas of the market. Twitter (TWTR) and LinkedIn (LNKD), social media stocks with astronomical valuations and no earnings, for example, missed out on the rebound and remain down significantly this year.