"While the beating that momentum stocks have taken over the past month has garnered plenty of attention, the major U.S. stock indexes are once again perched near record levels.
Much of the turbulence has been concentrated in social-media companies, cloud-computing firms and early-stage drug producers. As these so-called momentum stocks have dropped sharply, the worry has been that they’d take the broad market down with them.
That hasn’t played out.
Many investors now believe that the big flows of money into and out of these stocks will have little impact on the appetite for bigger, more-established companies. There is renewed confidence that the broad indexes are poised to move higher once the so-called momentum stocks stabilize.
The Dow Jones Industrial Average, coming off its biggest gain of the year during the holiday-shortened week, is only 1% from its all-time high. The S&P 500 is positive for the year and is only 1.4% from its own record hit earlier this month.
By comparison, the Nasdaq Biotechnology Index, which doubled from early 2013 through the beginning of this year, is down 14% over the past month. The Nasdaq Internet Index is down 9% over the same time frame.
“Investors have collectively realized that earnings and growth assumptions in these highflying stocks were too aggressive and hard to come by in a world of low nominal growth and weak pricing power,” Mr. Zhao said. “As a result, they have run for the exits, causing prices to fall.”
The difference is that the broad market hasn’t felt the same pain.
“Such localized shakeouts are an inherent part of any bull market,” he added. “Although high-valuation stocks have been hit hard in the U.S. equity market, the rest of the global financial markets remain very much focused on exploiting yield, playing various carry trades and taking on risk. This is another reason why the crack in social network stocks may not be foretelling of something bigger about to happen.”
The bull market, in its sixth year following the financial crisis, has shown signs of fatigue in 2014. After last year’s 30% rally, the S&P 500 is up just 0.9% this year. As MoneyBeat columnist E.S. Browning pointed out, the S&P 500 hasn’t dropped 10% or more since September 2011. That is twice as long as usual".
