Daily Gains Letter

Investors Causing Massive Shifts in Growth Stocks

By for Daily Gains Letter |

Key Stock Indices Soon DisappointYou can’t deny it: there are outright signs of stress on the key stock indices. We see investors are worried, and they just don’t like risk. We see huge selling in the growth stocks, with names like Amazon.com, Inc. (NASDAQ/AMZN) and Twitter, Inc. (NYSE/TWTR); they are witnessing a huge sell-off and are now in bear market territory. The biotechnology sector is getting slammed—investors are hitting the bid and running for the exit.

With all this happening, one question comes to mind: what happens next? Growth stocks can act as a leading indicator of what’s next for the markets. Are key stock indices setting up for a huge market sell-off ahead?

Sadly, as this happens, we are hearing a significant increase in the noise. The bulls say this pullback should be used to get into the sold-off companies again. The bears argue that key stock indices are going to shed more gains. Beware; your portfolio might get hurt.

When it comes to investing for the long run, it is critical that investors try to minimize the noise and look at the long term.

With this said, over the past few years, the key stock indices have increased significantly. 2013 was another stellar year. Key stock indices like the S&P 500 increased more than 30%. Companies that are getting sold off—for example, Amazon.com—increased roughly 50%. The NASDAQ biotechnology sector that’s plunging lower now had increased by more than 85% in 2013.

Going forward, it doesn’t look like the year 2014 will be anything like 2013. I expect the key stock indices to move sideways—trading in a range. These ranges may break to the upside, but the move won’t be as huge. We are seeing evidence of this already. Key stock indices fail to break and run away. Look at the chart below and pay close attention to the circled area where we see this phenomenon occur.

S&P 500 Large Cap Index Chart Chart courtesy of www.StockCharts.com

For key stock indices to go higher, you need growth in corporate earnings and growing business optimism. As time passes, we are seeing significant evidence that the corporate earnings aren’t as robust. We see a large number of companies are buying back their shares—and this causes their corporate earnings per share to look better. They are not beating their revenue estimates. This tells us that they are not necessarily selling more, but that earnings are coming through other means.

As I have repeatedly said in these pages, your investment strategy in this type of market should be to raise cash by taking profits off the table. Remember: if you do follow this investment strategy, the worst-case scenario is profit. Investors should also keep in mind that there may be opportunities in the making right now in the growth stocks, but it may be too early to get in. Investors should start to track companies that have good prospects but are currently in the midst of a sell-off.

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