The severe lag in growth stocks, especially big technology names, are puzzling a lot of shareholders.
Typically, we would expect stocks that have outperformed the market to consolidate near the end of the quarter as traders cash in to stuff their portfolios. However, those effects are typically minor.
In the past week, we have started to see multinational growth stocks drag behind the Dow Jones Industrial Average (^DJI). Today, the Nasdaq (^IXIC) and Dow Jones indices have shown the biggest disparity we have seen in a long while with a nearly 2% difference.
Brand name growth stocks like Coach (COH), Tiffany (NYSE:TIF), Yum Brands (NYSE:YUM), Baidu (NASDAQ:BIDU) and Apple (NASDAQ:AAPL), which have outperformed the market the prior months, are now feeling the winds shift. The pattern is that stocks with China exposure are getting slammed. The Dow Jones Industrial Average has outperformed all the growth names mentioned above by a whopping 5% in the last five trading days.
Dow Jones Outperforms Growth Stocks
Why The Sad Face?
Dr.Copper is now Dr.Doom and it is heralding a global economic slowdown by diving 25% in two weeks. Copper’s dramatic move lower has rattled investors' story of overseas growth from China.
Does Apple really deserved to be sold along names like Coach, Tiffany and Yum brands?
Is short, yes, but Apple still fared better than the rest. While Apple is down only 1.6% today, COH, TIF and YUM are all down over 6%. As mentioned in my previous article, I proposed that a significant amount of the growth that’s priced into Apple is coming from China, specifically the deal with China Mobile (NYSE:CHL). Consequently, any perceived weakness in the China global growth story will show up in AAPL’s tape. AAPL shareholders have to note that China is now Apple’s second biggest market next to the U.S. That makes sense as they are also the world’s second largest economy behind the U.S.
On a broader note:
As Dr. Copper is becoming Dr. Doom and the Dow (^DJI) outperforms growth stocks, institutional investors are remaining in the defensive rotation.
This range bound market is about to break very soon. Looking at technical indicators, the market looks to be headed for a meltdown rather than a breakout. I’ll explain my analysis in my next article.
Disclosure: I am long AAPL.