Wednesday, April 9, 2014

The Anatomy of an Internal Correction (excerpt)

The Nasdaq peaked on March 5. Let’s use that as the date on which the S&P 500 started what I still view as an internal correction, with money coming out of high-priced growth stocks and going into lower-priced value stocks. Let’s have a closer look:

(1) Information Technology. For starters, let’s focus on the Information Technology sector. As you can see in our Performance Derby table, since March 5 through March 7, it is down 2.8%. Now let’s sort the performance for selected industries in the sector from worst to best and show the forward P/E at the end of March: Internet Software & Services (-13.4%, 23.9), Application Software (-12.2, 36.1), Data Processing & Outsourced Services (-6.6, 19.7), Communications Equipment (1.9, 12.9), Systems Software (2.1, 13.5), Semiconductors (2.9, 14.9), and Semiconductor Equipment (4.8, 15.2).

(2) Health Care. Now let’s do the same for the S&P 500 Health Care sector, which is down 4.1% since March 5 through April 7: Health Care Technology (-12.9%, 32.7), Biotechnology (-12.4, 20.3), Health Care Distributors (-7.1, 16.5), Life Sciences Tools & Services (-5.7, 17.0), Pharmaceuticals (-2.8, 16.8), Health Care Services (-2.5, 15.1), Health Care Equipment (0.5, 16.1), and Managed Health Care (2.7, 12.8).

I’m seeing a pattern here of losses in the shares of industries with relatively high P/Es and gains in those with relatively low P/Es.

Today's Morning Briefing: IMF’s Bullish Outlook. (1) A happier outlook for all but Japan. (2) Eurozone’s recovery remains lackluster. (3) US growth set to increase. (4) Upbeat on India. Not so much on Brazil. (5) An economic scenario that will keep secular bull charging. (6) Three risks to worry about: Deflation, EM crisis, and Geopolitics. (7) CRB commodity index and world forward revenues are looking up. (8) Examining the internal corrections in S&P 500 IT and Healthcare sectors. (More for subscribers.)

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