The Market's Leadership Is Changing

05/11/2009 12:21 pm EST

Focus: MARKETS

Janet Brown

Editor, NoLoad Fund*X

Janet Brown, editor of NoLoad Fund*X, says the recent rise from the market’s lows could mean a change in direction for the market and many sectors.

April was far from the cruelest month. In fact, it was so good all around that many indices enjoyed their best month in years: 7.4% for the Dow Jones Industrial Average, 9.4% for the Standard & Poor’s 500, 12.4% for the Nasdaq Composite index, and 15.3% for the Russell 2000.

There was welcome evidence that confidence is returning globally. Both stocks and high-yield bonds surged here and abroad. The Dow Jones World Index jumped 12%, its largest monthly gain since it began in 1991. All indices staged striking rebounds from recent lows reached on March 9th, and the S&P 500 is up [more than] 30% from that date.

But remember that markets don’t move in a straight line. And, while market action is encouraging, some expect another test of recent lows before the bottoming process is complete.

From the fundamental side, a larger-than-expected plunge in first quarter gross domestic product (GDP) capped the worst two-quarter performance in more than half a century—serving as a reminder of just how weak the economy remains. Company profits are down 35% from a year ago.

Yet the stock market refused to sink in recent weeks. Resilience in the face of bad news may mean there is something positive in the stock market that we cannot yet see. As we’ve been reminding ourselves for months, markets turn before we see the reason for it—further confirmation [that] it is far safer to follow the market than to predict it.

Domestically, the previously hardest hit real estate funds led last month, followed by the equally decimated financials- those same companies that led the way down. Small- and mid-cap funds outperformed large-cap funds in April. Value funds as a group outperformed growth funds, although technology and communications funds continued strong and are by far the best performing sectors year to date.

Foreign funds outpaced their US counterparts last month, aided by a weakening dollar. Amidst the recent resurgence of risk appetite, the US dollar shed some of its previous safe-haven allure. Latin America and emerging markets were the strongest areas overseas. Diversified emerging market funds gained 15% on average, although Europe was not far behind.

Currently, top ranked funds are a good mix of international or global and domestic. We are prompted to upgrade several ETFs—selling consumer staples, health care and biotech and buying tech and emerging markets, along with several foreign country funds including Brazil, China, and Sweden.

Many question the legitimacy of the recent rally. We do not know if the market bottom is past. We do know that stock market volatility is a fact of life. Markets move unpredictably, and most short-term price movement is nothing more than noise. Long-term price movements, however, can constitute a trend. Transition periods are never easy.

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