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Swap Small-Cap Gains for Big-Cap Value

The Russell 2000 appears overpriced and due for a round of profit-taking

On Friday, better-than-expected earnings from Microsoft Corporation (NASDAQ:MSFT) and Amazon.com, Inc. (NASDAQ:AMZN) not only boosted their stocks, but sent the S&P 500 to a new closing high. And the Nasdaq, which achieved a new closing high on Thursday, followed with another new high.

The big technology stocks were not the day’s only success story. Starbucks Corporation (NASDAQ:SBUX) jumped 4.9% after it reported record results for its fiscal second quarter, overcoming cautious estimates.

Biotech stocks fell on an earnings miss by Biogen Inc (NASDAQ:BIIB), which dropped 6.6%, dragging the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB) down 1.1%.

FactSet reported that with 201 of the S&P 500’s companies reporting, quarterly profits are on track to decrease 2.8% from a year ago. A stronger U.S. dollar and lower oil prices were blamed for the decline.

Light, sweet crude oil for June delivery fell 1% to $57.15 a barrel as traders focused on an oversupply due to increased production from Russia and Saudi Arabia. One commodities research firm said that oil prices will continue to be under pressure in May and June due to U.S. stockpiles rising by 1.9 million barrels a day in Q2.

Gold futures for June delivery fell 1.6% to $1,175 an ounce, the lowest settlement since early March. The 10-year Treasury note’s yield fell to 1.92% from 1.95% on Thursday.

At Friday’s close, the Dow Jones Industrial Average was up 21 points at 18,080, the S&P 500 gained 5 points at 2,118, the Nasdaq rose 36 points to 5,092, and the Russell 2000 fell 4 points to 1,268.

The NYSE’s primary exchange traded 767 million shares with total volume of 3.3 billion. The Nasdaq crossed 1.9 billion shares. On the Big Board, there were slightly more advancers than decliners, and on the Nasdaq, decliners led by 1.2-to-1.

For the week, the Dow rose 1.4%, the S&P 500 gained 1.8%, the Nasdaq was up 3.3%, and the Russell 2000 rose 1.3%.

Russell 2000 Chart
Click to Enlarge

Chart Key

The Russell 2000 has outpaced almost all other indices since January, but this chart shows an angle of advance that is about 45 degrees. A sharp angle of attack can be sustained as long as earnings continue to improve. However, according to FactSet, recent quarterly earnings have not been keeping up with estimates.

Note the lack of a follow-up rally to the closed gap on the chart. This usually means that momentum is lagging.

Conclusion

There is no long-term bubble despite the media’s continued harping about one. With the S&P 500 trading at about 21 times trailing earnings, ChangeWave’s Josh Levine rightly points out that it is “considerably above its historical average” but also well below the extreme high points associated with a bubble.

The small-cap Russell 2000 appears overpriced and due for a round of profit-taking. With the smart money heading into the big-cap technology stocks of the S&P 500, it may finally be time for us to swap some small-cap gains for big-cap value.

However, whatever your investment strategy, don’t be misled by the bubble hawkers. Fear sells better than optimism, but historically, optimism results in better investment returns.

Today’s Trading Landscape

To see a list of the companies reporting earnings today, click here.

For a list of this week’s economic reports due out, click here.


Article printed from InvestorPlace Media, https://investorplace.com/2015/04/daily-market-outlook-swap-small-cap-gains-for-big-cap-value/.

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