Each stock was classified into an industry group, and it turns out that 32 were energy-related names, whether in oil and gas, oil services or coal. Biotechnology and pharmaceutical stocks made up the bulk of the remaining top performers. While each of these groups performed well during the index's rally Tuesday, they are two sectors with definitively different directions.
Energy stocks have been hit hard in 2014 due in large part to a decline in crude oil prices. As a result, the S&P 500 energy sector has lost 14 percent this year. That move lower has been filled with abnormally large swings in the stocks that are in that sector, and even more so with smaller capitalization companies that don't trade with as much ease and liquidity as larger names. The overall trend in the medium term has been to the downside for energy-related names, and that trend could continue.
"There's a long history of energy prices overshooting or undershooting any analyst's view of what fair value is, so we may continue to see some downward pressure for a while in the oil markets," said Atlantic Trust Chief Investment Officer David Donabedian. "I think the drop in oil prices is not yet a broad buying opportunity for energy stocks."
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Despite the turmoil in energy markets, some Wall Street experts are telling their clients to avoid being fixated on falling oil prices. "We do believe that this is going to be temporary," said Mizuho Securities USA Chief Investment Strategist Carmine Grigoli. "You will have positive effects on the consumer, and production cutbacks are not expected to be enormous or significant that it will alter the economy."
Meanwhile, biotechnology, pharmaceutical and health-care companies overall have traded with more volatility than the overall market, but the trend has been higher prices. Health care is the best performing sector in the S&P 500 this year, with a gain of 26 percent. The Nasdaq Biotechnology Index has gained an even more impressive 37 percent in 2014. Biotechnology stocks are already viewed by many investors as volatile, and small cap stocks in the industry also trade with even more volatility.
Trading in small cap stocks has been a roller coaster ride, and after all that volatility, the Russell 2000 Index is still just positive by 1 percent for the year. Still, some market technicians, who study historical price patterns, say that small cap stocks are at an inflection point. Greywolf Execution Chief Technical Analyst Mark Newton thinks that if the Russell 2000 can manage to trade above its recent highs, it could lead to a period of outperformance that would accelerate.