booked solid returns in October as the stock market scaled to new
heights despite a 16-day government shutdown that threatened
economic productivity. If history repeats this year, investors
can relax in November, which kicks off the S&P 500 and Dow's
best six months of the year historically.
The average U.S. diversified stock mutual fund rose 3.39% in
October and 25.46% year to date. Large caps took the lead over
small caps in the short run, but the latter remain in the lead
for the year. Large-cap growth funds climbed 4.22% in October and
26.08% year to date, while small-cap value funds returned 3.26%
and 28.76 over the same periods.
The S&P 500 jumped 4.5% in October and a juicy 25.2% year
to date. The Nasdaq rose 3.9% in October, boosting year-to-date
gains to a plump 31.1%. The Dow industrials added 2.8% for the
month and 21.0% for the year.
has overheated and is due for at least a 3% to 5% pullback, says
Mark Arbeter, chief technical strategist at S&P Capital IQ.
The market's 15-day rate of change topped 7% as of Oct. 29 -- the
fastest since January 2012.
"Over the past couple of years, whenever the 15-day rate of
change has reached 5% or above, the market has either paused,
pulled back or corrected," Arbeter wrote in his weekly technical
report Friday. "I have to remind myself that markets never move
in one direction forever, and to never ignore historical price
In addition, the Chicago Board Options Exchange put-to-call
ratio, along with market sentiment surveys from Investors
Intelligence and the National Association of Active Investment
Managers, show overwhelming bullishness and very little
bearishness. As contrarian indicators, they suggest the market
will go against the crowd.
Record Earnings Season
With a little more than seven in 10 S&P 500 companies
having reported third-quarter results, earnings have grown 4.2%
year over year. Consumer discretionary companies grew profits
most, up 10%, while the energy sector was the only one to see
earnings drop, by 8%.
The index is on track to grow earnings 5.8% year over year for
2013. Nearly seven in 10 companies have eclipsed forecasts --
slightly better than the long-term average of 63%, according to
But earnings beats may not carry much significance considering
analysts have lowered expectations en masse.
About two in 10 companies have made negative
pre-announcements. About half of the companies topped revenue
estimates, which is much lower than the long-term average of 61%.
Sales have increased 3.7% year over year, with eight of the 10
S&P sectors expecting growth.
The financials sector are dragging down sales growth as banks
struggle to grow revenue in a low-interest-rate environment, Mark
Litzerman, manager of proprietary equity strategies and research
at Wells Fargo, wrote in a client note. At the same time, energy
sector revenue fell because global demand has stagnated, while
increased U.S. output has boosted supply.
Sector Fund Performance
Consumer goods funds rose 4.43% in October and 22.52% year to
Consumer staple companies are "recession-resistant and have
lower volatility in earnings," said Paul Karos, a portfolio
manager for Whitebox Mutual Funds, a Minneapolis-based
alternative investment firm with $2.5 billion in assets under
management. "It's much better to have cyclical industries leading
the charge in a market run-up because it signals economic
This suggests institutional investors are favoring defensive
sectors given the economic weakness, which was confirmed by the
fact that the Federal Reserve announced it will continue to be
"highly accommodative" in its monetary policies and it will scale
back quantitative easing in 2014 at the earliest.
"Regardless of consistently overly optimistic forecasts by the
Fed, the data paint a much more dismal, glass-half-empty view of
the economy," Lindsey Piegza, managing director and chief
economist at Sterne Agee, wrote in a commentary. "If you like a
growing Fed balance sheet and continued accommodation for the
foreseeable future, you are in luck."
JPMorgan's equity strategists say the Fed stance has mutual
fund managers buying defensive stocks to protect gains, while
hedge fund managers are doing the opposite and buying
"We believe this is likely the result of a need to improve
relative performance (the HFRI Index was up 5.2% vs. 19.8% for
the S&P 500 total return index through Sept. 30)," they
wrote. "Consequently, we believe hedge funds will continue to add
to cyclicals into year-end.
"Hedge fund buying will lift index levels, triggering mutual
funds/long-only to move back towards a higher-beta position
(reversing what we believe is a move towards more defensive
stocks)," JPMorgan strategists added.
"Of course, we continue to see other supporting arguments as
well, including: 1) improved economic visibility and 2) relative
value, in addition to the risk of performance slippage."
They recommended overweighting such stocks asPeabody Energy (
),Whiting Petroleum (
),CA Technologies (
),EOG Resources (
),Delta Air Line s (DAL) andUDR (UDR).
The worst-performing major sector, precious metals funds,
slipped 0.33%, leaving the year-to-date decline at 40.98%.
Gold bullion prices were nearly flat for the month, ending at
$1,324 an ounce. The yellow metal failed to rally even after the
Federal Reserve announced it's maintaining its easy money
policies, defying widespread expectations that it would scale
back bond purchases.
"The gold market perhaps is focusing on the eventual reduction
in stimulus, rather than the immediate continuation of it,"
Adrian Day, founder of Adrian Day Asset Management in Annapolis,
Md., with $125 million in client assets and manager of EuroPac
Gold , said in an email.
"The Fed saying (again), 'we won't reduce bond buying (because
the economy is not strong enough) but we will eventually' is a
very gold-bullish statement to me. But the gold market focused
only on those last few words."