Markets were soaring on Monday, particularly among those higher-risk growth stocks that had previously been experience a broad sell-off since the start of March. The positive day wasn’t discriminatory, as blue-chips and large-caps were performing as well with the Dow Jones Industrial Average (DJIA) and S&P 500 both appeared to be headed towards new record closes as the markets entered the final hour of trading.
However, the most-volatile of the major indices in recent weeks has remained the Nasdaq Composite Index. The Nasdaq, which is composed of all those stocks that trade on the Nasdaq exchange, can be viewed to some degree as representative of the sort of growth stocks that have been a focal point for markets since the start of March. It’s an imperfect proxy, to be sure, as the Nasdaq also includes any number of blue-chip stocks like Apple (AAPL) and Google (GOOG) while only including those growth stocks that trade on its exchange, but the degree to which the Nasdaq differs in action from its large-cap brethren can be telling.
And the picture gets clearer when one digs a little deeper and looks at some of the more-specific indices and ETFs that track the stocks in question. Most notably where they outpace the Nasdaq, indicating that they’re more likely driving the day’s gains than riding them.
The Russell 2000 Index, made up of the smaller 2,000 companies on the Russell 3000 index, was up over 2.5 percent on Monday; the Vanguard Information Technology ETF (VGT) gained nearly 1.75 percent; the First Trust DJ Internet Index ETF (FDN) jumped over 3 percent; and the PowerShares Nasdaq Internet Portfolio (PNQI) rose more than 3.25 percent.
On the whole, this is another day where money appeared to be flowing into or out of growth plays as investors look unsure about whether the current market environment is risk-on or risk-off. Certainly, this current correction, when viewed broadly, appears to be a reaction to the 5-year bull market that appeared to peak last year.
With stocks appearing to be reaching highs, many may be looking for an opportunity to get out of growth plays and into something more stable, particularly as we enter the “worst six months” to own stocks. However, the day’s big gainers appeared to be in two industries that may be the most correlated to the broader performance of the market in the last two months, potentially indicating that many investors view them as high-risk, high-reward segments.
Biotech stocks were soaring on Monday, with the iShares Biotechnology Index ETF (IBB) up nearly 2.5 percent and the SPDR S&P Biotech ETF (XBI) gaining nearly 3.5 percent. Meanwhile, the ever-volatile solar industry once again bounced hard in the positive on a day when tech and growth stocks were gaining, with the Guggenheim Solar ETF (TAN) jumping over 5 percent.
On the whole, this most-recent big day for the Nasdaq continues to leave things unclear. Since the start of the current market volatility, the Nasdaq has followed a pattern of a sharp decline followed by an equally share rebound, then falling even further on the next decline. This whipsaw action seems to indicate there’s still bulls out there looking for their spots and jumping into growth stocks when they feel like they see value.
However, the overall trend has still been down, with the index declining over 4.75 percent since March 5 even with today’s big jump included.
That makes the remainder of this week notable. If the pattern continues, this could just be another crest prior to another big decline, continuing with the market correction many have insisted has been overdue for some time. However, if the bulls can get momentum, it seems possible that stocks could experience a reversal and see money flow back into traditional growth plays as investors regain their appetite for risk.
Either way, this coming week and the rest of May could hold some interesting market action that may ultimately help define the market action for the rest of the year. As the last few Q1 earnings reports trickle in and the market digests all of the data, investors could be gaining the confidence they need in recent weeks to make a firm move.
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