When will the rotation end?
I have said for days that all this talk about rotation out of biotechnology and big momentum Internet stocks actually involves very few companies.There are essentially two dozen or so caught up in this whirlwind: of those, most of have lost roughly 20 percent in the past month.
Earnings expectations are absurdly low, which means it will not take much to beat them. There seems to be a combination of yen carry trade unwinding (Japan's currency has been strengthening last several days). Most of all, there are concerns about how strong U.S. second quarter growth will be (10 year yields are generally lower). The Federal Reserve's taper may also be an influence.
So are we anywhere near a bottom? I don't know, but I can tell you that there has been a lot more attempts to buy protection in the last week. Don't go by the VIX: there are a lot more ways to hedge than just puts on the S&P 500. Also, as favored groups like the Biotech ETF have dropped dramatically, the short interest has spiked up dramatically —that, of course, represents shares that have to be bought back.
There's an app —I mean, a fund for that. All this is a simple way of saying that growth is now underperforming value. If you look at a chart of the iShares Russell 2000 Growth ETF versus the iShares Russell 2000 Value, you would see Growth outperformed Value for most of this year, but has fallen down in the last few weeks. The growth fund is now down 3.6 percent for the year, while value is off 0.7 percent.
You might be surprised how many stocks are characterized as "value." For example many small tech names are listed on that category, because they tend to trade at a lower price relative to their fundamentals (dividends, earnings, price to book, etc.).
Small cap performance this month has been fairly grim:
Yelp down 14 percent
Biotime down 10.6 percent
Cray down 10.3 percent
Galena Biopharma down 9.6 percent
Meanwhile, small cap value has been anything but this month:
Triquint Semi down 2.8 percent
Lattice Semi down 2.2 percent
down 2.5 percent
Beazer Homes down 2.3 percent
This is also true of large cap value vs. growth stocks. Look at what's up in S&P 500 value this month: energy and tech!
Anadarko Petroleum up 14.3 percent
Kellogg up 3.7 percent
Cisco up 1.9 percent
Apache up 1.4 percent
IBM up 1.1 percent
My point: a lot of tech companies are actually "value" names because their growth has slowed, yet they still offer longer-term returns. Little wonder that, after a period of underwhelming, some of these names are back to outperforming once more. Meanwhile, Aloca (a big bellwether stock) will be reporting after the bell tonight.
High frequency trader Manoj Narang, head of Tradeworx, has penned an excellent piece on high frequency trading for Institutional Investor entitled "A Much-Needed HFT Primer for 'Flash Boys' Author Michael Lewis" You can find it here.