There has been a lot of hand-wringing over the recent sharp decline of high-growth stocks, with some pundits stating the setback heralds the end of the five-year bullish trend in the stock market.
This view is probably short-sighted, however, because in fact there have been many such declines since the current bull market began in March 2009, and high-growth momentum stocks get tripped up fairly frequently. These blow-ups create a lot of volatility, but they are very rarely an omen of bad tidings to come.
Additionally, the greatest single year for a major index, 1999, featured four separate 10% declines in the Nasdaq 100. And the index still managed to finish 101% higher that amazing year.
By the way, as analysts at Cornerstone Macro point out, a transition from growth stocks to value stocks is consistent with an improving economy. When the economy is weak and growth is scarce, investors are willing to pay up for high-growth companies. But when the economy is stronger and growth is more plentiful, investors tend to be more patient and prefer value stocks, and particularly cyclicals.
Growth is not spectacular right now by any means, but it is in gear. And it should be helped along by lower oil, gas and gasoline prices in coming months. The growth-stock squall should pass before long, and in its wake those stocks should recover a bit and get color back in their ashen faces — but the next big stars are likely to be their less flashy cousins in the value aisle.
In other words, the main thing to understand about trading the stock market right now is that whatever worked in 2013 is likely not going to work again this year. The reverse is also true, as stocks and sectors that were weak last year are perking up nicely in 2014.
This also helps explain why the growth-oriented techs of last year are struggling, while the value-oriented materials and energy stocks are enjoying surprising success here in the second quarter so far. With this in mind, I’m recommending a short-term energy play for you today.
Trading oil and gas driller EOG Resources (EOG) is kind of cheating, because it actually did perform well last year. However, EOG’s group, the energy companies, fared poorly in 2013, so it is just at the vanguard of a reawakening sector that is broadly outperforming in a challenging period.
EOG continued in its role as a sector and market leader last week, rising 0.5% on Friday despite the broad weakness. The success of energy stocks is due in part to fears of supply disruptions in Europe attributed to the escalating crisis in Ukraine.
Buy EOG at $98.90 limit, good till canceled, as the stock crawls up the upper boundary of its Keltner channel after a brief touch of the midline. When filled, set up to sell the position at target $102.50.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.
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