Robert Maltbie Jr. Featured in Investor Business Daily Leaderboard Article

Investors Greet New Year By Selling Broadly

Stocks succumbed to profit-taking last week. That’s not a surprise, given the market’s ability to fashion decent double-digit gains in 2014.

The Nasdaq composite led the downside, falling 1.7%. That marked the index’s third weekly decline over the past five weeks.

The S&P 500 dropped 1.5%, taking a big bite out of the prior two weeks’ worth of solid gains.

The IBD 50 sank 1.6% for the week.

Volume in the past two weeks was unusually light, reflecting slow action around both the Christmas and New Year’s holidays. Next week will showcase the first full week of trading since the week ended Dec. 19.

A brief scan of the financial headlines in recent weeks reveals a somewhat optimistic stance for equities in 2015. But every seasoned stock trader knows that forecasts are kind of like preferring red over black at a Las Vegas roulette table.

It’s much better to consider what happened in 2014 and then assess the market’s condition today.

One, the Nasdaq composite dropped in January last year, yet finished the year with a healthy 13.4% gain (better than the S&P 500’s 11.4% advance).

Two, crude oil’s plunge helped shape the year’s big winners and losers.

Three, breakouts continue to work. But when the market’s uptrend is under pressure, the probabilities of gains go down quickly.

Four, the U.S. Treasury bond markets proved robust in 2014. Low yields on government bonds make equities attractive.

Five, 2014’s upside carried a big defensive streak. As seen in the Market Indexes table on page B11 in Friday’s IBD, the Dow utilities ramped up 26% last year and the IBD Defensive Index up 19.3%.

Six, a big wave of money into exchange traded funds helped fuel gains in index ETFs and apparently made it more difficult for active fund managers to beat the market.

The IBD Mutual Fund index finished 2014 up a measly 2.4%. The comparison with the S&P 500 is wretched.

Robert Maltbie, a veteran micro- and small-cap money manager and managing director of Millennium Asset Management, notes that small-cap stocks did not perform as expected last year due to what he calls “liquidity prejudice,” something he hasn’t seen since 1994.

The “prejudice” comes from the fact that even though small-cap stocks look attractive in terms of liquidity, market sentiment, technical indicators, earnings growth, monetary policy and valuation, the massive inflows of money into ETFs that represent the large-cap space have distorted returns.

“Our indicators on balance have been bullish, but our asset class has been bearish,” Maltbie told IBD. “This was one of the most challenging years I’ve experienced as a portfolio manager.”


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