A Look Back at the Damage

July 24, 2014 7:45 AM

Of all the divergences and reasons to think this bull run might be coming to an end, the one I thought most probable was the momentum wreck we saw from March to May. These “leading” stocks that are on every traders’ screen were absolutely annihilated. It was a fair question to ask “how long can this continue before it spills over to the Clorox’s and Pepsi’s of the world?”

The damage was fast and severe as these names were punished with impunity. Fundamentals just didn’t matter, if the market had blessed you with a high multiple, you were now cursed ten fold.  FireEye lost 75% of its value in only fifty trading days. This is something you can expect to see in penny stocks; FireEye at one time had a $13B market cap! Workday, a company who once boasted a $20B market cap, lost nearly half its value in only thirty-two trading days!

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This devastating action brought the Russell 2000 down with it, which succumbed to a 10.9% peak-to-trough pullback. The S&P 500 on the other hand only sneezed back 4.4% and barely ticked into negative territory on the year. 

Four months later, as the broader indices are making new highs, it really is pretty remarkable that we were able to fight off such a major warning sign. After a thirty percent year in 2013 and the fourth longest streak of all time without a twenty percent correction, this market had every opportunity and excuse to pull back, only it didn’t and still hasn’t. This should be a good reminder that in bull markets, divergences are guilty until proven otherwise.

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