For 2017 to date the NASDAQ Composite was up 28.2% as of November 3. The Standard & Poor’s 500 was up 14.74%. And the small cap Russell 2000 was ahead 9.7%.
That’s already a strong incentive for money managers to push money into the NASDAQ. No manager wants to have to go into an investor’s meeting in January and explain why his or her portfolio is light technology but heavy small retail stocks, for example. Typically we see buying of the year’s winners to date and selling of the year’s losers to date in the last couple of months of the year.
I’d expect that trend to be intact for this November and December, but even more so than usual.
And that’s because a few stocks have so dominated market returns this year that no professional money manager can afford to be seriously underweight those stocks come January. And even individual investors, who don’t need to report to anyone but themselves will feel the pressure to stock up on the winners of 2017 in the remaining months of the year.
Don Kaufman over a TheoTrade built a five stock index that exactly captures this trend. Kaufman’s index consists of equally weighted positions in Facebook (FB), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG) and Amazon (AMZN).
Remember how badly the technology heavy NASDAQ has killed the S&P 500 this year? More than 13 percentage points to the upside for the NASDAQ, right?
Well, Kaufman’s 5-stock index has beaten the NASDAQ itself by that much again with its gain for 2017 to date as of November 3 a huge 42.2%. That’s 14 percentage points better than the gain on the NASDAQ.
Looking at this, if you were a professional money manager where would you be putting your cash now? Even if fear of that January investor’s meeting wasn’t an issue.
In a momentum market, which is what we have, you put money into the stocks that are riding the momentum upward.
That holds true on the downside too. This market has taking the losers and crushing them some more. Look at retailer Bed Bath and Beyond (BBBY) for an example of the pattern. The stock is down 52.61% for the year as of November 7. Despite that punishment, nobody still wants to own this stock. In the last month the shares are down almost 16%.
A plunge in the share price this year isn’t bringing out buyers. Instead the value folks are sitting on their money convinced that the market is going to break. The rest of us, who aren’t so firmly tied to our convictions are buying what has been going up. And selling what has been going down.
It’s hard for me to see that this pattern ends before the year itself does.
Which creates a very strong argument for portfolio rebalancing in January. Which is the topic of my next post tomorrow.