So far this year, the NASDAQ Composite Index has outperformed the other large-cap averages, and this is a positive indicator.
At the beginning of last year, blue chips shot out of the gate with uncommon capital gains, and as confidence in the rally grew, investors slowly felt more comfortable with more speculative issues, which are often listed on the NASDAQ.
After a pronounced consolidation during the summer of last year, large-cap NASDAQ stocks, like Microsoft Corporation (MSFT), Juniper Networks, Inc. (JNPR), and even Intel Corporation (INTC), reaccelerated.
I view the price reacceleration in large-cap technology stocks as a combination of attractive valuations and yields and improved expectations for growth. Microsoft’s fourth-quarter sales are expected to grow some 10%.
While blue-chip strength is always helpful, large-cap technology stocks must be a big part of the long-term trend, as they are such a large part of the daily economy now.
The Russell 2000 Index of small-caps is also holding up extremely well and is another positive indicator for the broader market. While stocks are very much in need of a correction, it won’t happen without a major catalyst, and trading action among large-cap technology and small-caps is reason enough to expect more capital gains. The chart of the Russell 2000 Small Cap Index is featured below:
Chart courtesy of www.StockCharts.com
Also not to be forgotten is the Dow Jones Transportation Average, which is still just a hair off its all-time record-high. Transportation stocks are always a leading indicator, and if you attribute any worth to the performance of airline stocks, their year-to-date performance is also a positive signal.
Given current information, a major retrenchment in the stock market would be a buying opportunity. With this in mind, the U.S. economy can experience its next technical recession within the context of a secular bull market. This is entirely possible this year.
But the positive dynamics for equities remain intact. Low short-term interest rates are a certainty this year. The health of U.S. corporations, especially brand-name large-caps, is extremely good and at a minimum; earnings maintenance is a high likelihood, as higher prices have demonstrated not to adversely affect demand.
And finally, while there has been frothy initial public offering (IPO) trading, countless blue chips are not expensively priced. Their stocks might be at all-time record-highs on slow prospects for growth, but valuations aren’t out of their norms yet for many of these companies. (See “If You Don’t Want to Leave This Market, Stick with These Proven Winners.”)
So, my 2014 outlook for equities is still positive given current data, especially if corporations can meet or beat consensus in the first half of the year.
Stocks are due for a correction, but technically, I don’t see it happening with the current relative price strength from the NASDAQ, Russell 2000, and transportation stocks.
I wouldn’t chase after any position in this market, and that goes for yields as well. But with corporate balance sheets in such strong shape and the cost of money being so cheap, increased dividends and share buybacks once again bode well for blue-chip stocks.