Since our previous visit, the NASDAQ has broken to an all-time 15-year record high, while the S&P 500 also eclipsed its record. While the stock market continues to be characterized by bullish investor sentiment, the vulnerability to the downside remains.
The rise in technology stocks makes the advance vulnerable to any major bad news, especially with the high-flying momentum trades in the stock market.
Take a look at what happened to social media play Twitter, Inc. (NYSE/TWTR) in the stock market. The stock plummeted over 20% after reporting a shortfall in its first-quarter revenues and axed its guidance for 2015. This is not what you want to see from a momentum play in the stock market. Now, while Twitter will drive some overhang, it’s more of a company-specific issue. Competing momentum plays Facebook, Inc. (NASDAQ/FB) and Netflix, Inc. (NASDAQ/NFLX) continue to report excellent metrics, with Facebook being the best of breed in the social media space.
There’s also Lumber Liquidators Holdings, Inc. (NYSE/LL), crashing over 15% after a major shortfall in its earnings amid accusations that the company knowingly imported toxic laminate from China. Lumber Liquidators Holdings was formerly a high-flying momentum stock that traded at over $90.00 in the stock market. The stock now trades at the $20.00 level. Unless you’re a gambler, I would be careful here.
What’s happening here is that the stock market has become more of a stock picker’s market. You just can’t jump on any stock and have it go higher as in the past five years of the bull market.
There are also earnings concerns, specifically the impact of the strong dollar on American exports and multinationals.
The economy expanded at a muted 0.2% annualized in the advance reading of the first-quarter gross domestic product (GDP), well below the estimate of 1.0% and down from the 2.2% in the fourth quarter. The weak growth was attributed to the bad weather, the West Coast port labor issue, and the strong dollar’s impact on U.S. exports.
The strong dollar has placed a drag on the Dow Jones Industrial Average, where the majority of components have major foreign exposure. Here we are talking about the likes of Wal-Mart Stores Inc. (NYSE/WMT), The Proctor & Gamble Company (NYSE/PG), Johnson & Johnson (NYSE/JNJ), Visa Inc. (NYSE/V), and Apple Inc. (NASDAQ/AAPL). So you have to approach these with more caution.
What kind of stocks should investors look for in this kind of environment?
An example of a non-Dow stock that has also proven itself over time in the stock market is Colgate-Palmolive Co. (NYSE/CL).
Dow stocks that have less foreign exposure include The Home Depot, Inc. (NYSE/HD) and Verizon Communications Inc. (NYSE/VZ).
These are great companies that have proven themselves over decades in the stock market and will continue to be the go-to stocks for the more conservative investors going forward. The strong dollar could lead to price weakness in these stocks, which I would view as a buying opportunity.