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USA Today: Risky Stocks Are in the Stock Market Driver's Seat

By    |   Wednesday, 26 February 2014 01:18 PM

Speculation has taken a front row in the stock market, as risky stocks are fueling Wall Street's surge toward new highs, USA Today reported.

Stocks that are usually the riskiest, like biotechs, small caps and cyclicals, are leading the charge thus far in 2014.

"It's 'game on' for the market, and it's 'risk on' for what's rewarding investors," David Sowerby of Loomis Sayles told USA Today.

Editor’s Note:
These 38 Investments Have a 96% Win Rate

Sectors such as utilities and financials are lagging the stock market now, with returns of less than 5 percent, because safety and dividends are out of style, according to Sam Stovall of S&P Capital IQ.

Meanwhile, the SPDR S&P Biotech exchange-traded fund (ETF) is up 18.9 percent. "Biotech is on fire," Stovall noted. "Biotech is bigger than it used to be. It has the critical mass to push the group."

At the same time, small-cap companies, typically sought by investors who are looking for strong gains and willing to take extra risk, are also surging in 2014. The Vanguard Small-Cap ETF is up 7.7 percent from the February lows and trending ahead of the broader S&P 500.

Consumer discretionary, materials and energy stocks — all of them cyclicals — have also been top performers since the Feb. 3 low in stocks this year. Cyclicals depend heavily on a strong economy in order to grow their businesses.

Chris Marx, a senior portfolio manager on AllianceBernstein's Global Value Equities team, predicted value stocks may soon play catch-up to the risky high-flyers.

In the heady gains of 2013, "most of the action went to already popular, richly valued stocks (typically companies offering the fastest or the most reliable, immediate profit growth), while low-multiple, controversial stocks were left standing by the side of the dance floor," he wrote in a client note.

Now the most expensive 20 percent of global stocks are trading at 8.1 times book value, the second highest premium going all the way back to 1971. But the cheapest 20 percent of stocks sell at 0.9 times book value — a gaping 57 percent discount to the broad market.

"The last time value stocks lagged expensive ones by this much in a bull market was during the late 1990s, when red-hot technology and telecom stocks left almost everything else in the dust. After that bubble popped, value stocks reclaimed the lead," Marx said.

"Since spreads are so wide today, we see large payoff potential over time for strategies that concentrate on inexpensive stocks and avoid expensive ones."

Valuation considerations aside, MarketWatch columnist Kevin Marder is optimistic the bull market is intact.

"Absent a catastrophic event that comes out of nowhere, there will normally be a period of weakening momentum before an ensuing bear market takes hold. This will be a signal for the speculator to lighten positions and raise cash," Marder wrote.

"That point is not in the offing," he predicted.

Editor’s Note: These 38 Investments Have a 96% Win Rate

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Speculation has taken a front row in the stock market, as risky stocks are fueling Wall Street's surge toward new highs, USA Today reported.
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2014-18-26
Wednesday, 26 February 2014 01:18 PM
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