March 2014 – NEW YORK — After the stock market’s best year since 1997, warning flags are starting to go up on Wall Street where stock turbulence is on the rise and froth is being rubbed out. This year’s first quarter, which ends Monday, isn’t nearly as bullish as last year, when the benchmark Standard and Poor’s 500 stock index soared 10% in the first three months of the year on its way to an eye-popping 29.6% gain. The broad market is unchanged in 2014 after recovering from an early-year swoon sparked by turbulence in emerging markets and uneasiness surrounding the Federal Reserve’s decision to start pulling back on its bond-buying stimulus program. Russia’s decision to annex Crimea has added to investor angst as geopolitical risk enters the equation. But the market itself is acting poorly, amid growing signs that investors have lost their stomach for investing in many of the market’s most popular and best-performing stocks and sectors. “Some of the froth is coming off,” says Russ Koesterich, chief investment strategist at BlackRock. “There’s a little bit more risk aversion, and when risk aversion rises it breaks the momentum trade.” A bunch of warning signs are popping up:
1. Not-so sweet IPO.
The high profile initial public offering of King Digital, the marker of the game app Candy Crush, got crushed, plunging nearly 16% in its first day of trading, vs. an average first-day IPO pop of 22%, according to Renaissance Capital. The dive sent shivers through the frothy IPO market, which has been flying high and earning comparisons to the IPO peak in 2000. Still, three new IPOs finished higher Thursday, with gains ranging from 14.4% to 23%.
2. Hot momentum stocks cool off.
Wall Street “story stocks,” such as mega-popular plays favored by Main Street investors, such as social media darling Facebook and electric-car maker Tesla, are getting slammed after skyrocketing earlier in the year. Facebook is 16% below its recent intraday high and Tesla is down more than 20%, which puts it in bear-market territory. Red-hot biotech shares, which were behaving in a speculative fashion, have also gotten slammed.
3. Leader turns laggard.
The once-hot Russell 2000, an index of small company stocks, that soared 37% last year and led the performance derby earlier this year, is not acting like a market leader anymore. Thursday, it closed 4.7% from its March 4 all-time high, and is now performing worse than the large company stocks in the S and P 500. Indeed, skittishness is making a comeback. Mutual fund investors are getting nervous. Last week, they yanked nearly $4 billion out of U.S. stock funds, marking the first outflows since mid-February. The question now is does the selling get worse? Or will investors in search of bargains swoop in and buy the dip, as they have since the bull market began in March 2009? For now, Koesterich says the market action is nothing “sinister.” The recent turbulence, he says, is more reflective of a change in leadership, as investors rotate out of big winners and into stocks that sport better values. “So far it looks more like a rotation than a crack in the market,” says Koesterich. –USA Today