NASDAQ Grinds Higher While DJIA and S&P 500 Tread Water: Our Strategy

Fellow Investor,

It has been an interesting month in the markets since our last update to say the least. Equities were testing the top end of their trading range for most of the past thirty days with the NASDAQ posting all-time highs. The triggers for the rally included optimism around the latest deal around Greece that kicked the can down the road, at least until 2016. The market was also buoyed as it appeared the Chinese authorities managed to arrest the steep decline within their equity markets.

However, those gains started to evaporate last week as the Dow gave up some 600 points from its highs on Monday as investors started to factor in the first half of the year is providing no year-over-year earnings or revenue growth in the first half of the year. The commodity complex is just downright ugly as global mining stocks are in freefall and the energy sector has posted 12 straight weeks of decline. The S&P 500 after this gyration is pretty much exactly where it was a month ago.

One of the worrying signs of the market recently is how much breadth has been narrowing as stocks have continued to grind up. All of the NASDAQ’s rise this year is due to the five largest stocks in the index, of which only Apple (NASDAQ: AAPL) sports an attractive valuation. The rest seem to be in nosebleed territory such as Netflix (NASDAQ: NFLX) which is going for more than 200 times next year’s profit projections.

The market is being primarily driven by momentum right now. It is hard to get my mind around how investors can bid up Amazon (NASDAQ: AMZN) more than 15% on the day it reported a surprise profit of $92 million for the quarter and surpassed the market capitalization of giant retailer Walmart (NYSE: WMT) which posted earnings of over $3 billion in its last completed quarter. Meanwhile Apple reports an almost 40% increase in year-over-year earnings to some $11 billion and the stock sells off on the results.

Although it is getting harder to find relative bargains in what I consider an overbought market, I believe investors should have a good slug of their portfolios in large cap growth positions selling at reasonable or attractive valuations. If/when a correction comes to the market these names should hold up much better than the market as a whole. I expect the momentum names that have driven a good portion of the gains in the market in 2015 to take the brunt of the pain when a pullback in equities does occur.

Until then we will continue to build the Blue Chip Gems portfolio slowly and prudently as I believe there is a good chance we will have some lower entry points in the months ahead.

If you ever have a question or comment you can reach me at [email protected].

Now let’s get to this month’s issue. Just click here.

Thank you and Happy Hunting.
Bret Jensen
Editor, Blue Chip Gems