Stocks face leadership crisis as May begins
The stock market (^GSPC) is struggling with a sudden leadership crisis. Thursday’s 1% drop in stocks and slight lift in Treasury yields was largely just a gentle re-pricing of markets to account for a Fed rate hike coming into view and pressured corporate earnings.
As a new month now gets underway, U.S. investors will lack the usual clues about market direction that come from European stocks – the leaders of the global rally so far this year, which have pulled back sharply of late. That’s because markets on the Continent are closed for May Day.
But even back home, the makeup of the sectors selling off shows the flagging of once-reliable leaders. We spoke yesterday of the retreat after earnings of growth leaders such as Facebook Inc. (FB), Twitter Inc. (TWTR), Under Armour Inc. (UA) and Buffalo Wild Wings Inc. (BWLD).
Meantime, the typical pattern when those beloved fancy growth stocks roll over is for the boring, stable dividend payers to advance and help support the indexes. That’s not happening now, because 10-year Treasury yields have edged above 2% with Fed action still in play.
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The charts of the “bond proxy” sectors are all slumping - even in a risk-off tape. This includes the bellwether Vanguard REIT ETF (VNQ), which has slid by some 6% in the past month. It’s about the same story for the Utilities sector ETF (XLU), also off around 6% for 2015. And the iShares Select Dividend fund (DVY) has made no headway at all this week, month or since December for that matter.
While the broad indexes are only about 2% off their recent record highs, the “nowhere to hide” vibe within the market makes it crucial to monitor the action in some once-and-possible-future leaders.
Here are four to keep on the screen today.
-Small-cap stocks have been pounded, with the Russell 2000 (^RUT) suffering a 3.7% loss so far this week. The backup in the U.S. dollar is draining money from this favored domestic-economy play. The drop has brought the index close to its March low and the velocity of it has the chart readers a bit concerned.
-LinkedIn Corp.’s (LNKD) lousy results and outlook will hammer that stock today. But more broadly, there is some intense questioning happening now about social-media business models and user intensity – given stumbles by Yelp (YELP), Twitter (TWTR) and others. Watch the Global X Social Media Index ETF (SOCL) as your key for whether the loss of faith in Web 3.0 spreads.
-The Healthcare sector has been a quiet locomotive of this bull market for years now. The stocks appeal both to value and growth investors, dividend hogs and biotech speculators. Most Wall Street strategists have favored the group, and it’s arguably “over-owned.” Yet the main ETF for healthcare stocks, under symbol (XLV) has pulled back fairly hard. Gut check time for the health names.
-Finally, there’s Walt Disney Co. (DIS), a nearly bulletproof beacon of quality and audience acclaim. The stock trend still looks great even after a 1% dip in yesterday’s market mess. The news flow should favor Disney for months to come. The “Avengers” sequel just opening here is tracking toward $200 million, and Disney will possibly have a box office blockbuster contender in theaters from now into 2016: “Tomorrowland” debuts in three weeks, Pixar’s “Inside Out” in the summer, then “The Jungle Book” adaptation in the fall and, of course, the first “Star Wars” release under Disney’s ownership come December.
Disney is not just about new films, of course, and a lot of the good news is already in the stock. But investors who get a chance to pick up this leader on a stiffer pullback would probably count themselves lucky. If this stock fails in a big way, then we’ll really have a leadership crisis.
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