NEW YORK (TheStreet) -As so-called momentum stocks like Whole Foods (WFM), Tesla (TSLA), Amazon (AMZN) and Facebook (FB) continue to suffer, it is instructive to dive into the strength in the overall market.
In particular, the Dow has been the outperformer versus the S&P and certainly the Nasdaq particularly in recent days. What's behind this? Ultimately, a flight to quality to blue-chip companies, in the Dow and outside of the Dow. Look at the chart of Proctor & Gamble (PG) after a ho-hum quarter, McDonalds (MCD) (particularly relative to Chiptole (CMG)), Schlumberger (SLB), and Johnson & Johnson (JNJ). How about Chevron (CVX) (wow, what a move!), Caterpillar (CAT), Disney (DIS), and Kellogg (K). The list goes on. The shift to safety kicked off back when Janet Yellen suggested a more robust market (and thus accelerated tapering and interest rate rising) back on March 19th. While she has clarified herself many times since this date, the flight to safety and the dropping of the momentum names has continued. And, as we've seen from the 10-year yields, rates have remained low, further increasing the appeal of dividend names--certainly a very different scenario than was anticipated in December, when investors were hyping the steepening yield curve (with financials and industrials as beneficiaries). After all, for investors like Grandma Jan that own treasury bonds and not getting the yield she wants, she certainly isn't going to jump to Facebook. She is going to look at Johnson & Johnson.
Now, given that we have seen a bubble in SECTORS of the market, there has been increased commentary about the idea that we are due for a significant correction. Let's dive into this. Where have we seen bubbles coming? In areas where quality companies have been able to outperform, causing more "me too" companies to come public, creating too much supply and pressuring shares--particularly when insiders with low costs bases unload to the public. Where is this? (1) New biotech companies coming public looking to jump on the bandwagon of the "Gilead (GILD), Biogen (BIIB), Celgene (CELG) and Regeneron (REGN)" of 2013 along with early stage biotechs that were formerly public that got bid up too high. (2) Software-as-a-service company using catch phrase drivers (read: "cloud") to mimic the multi-year success of names like Salesforce.com (CRM) and 2013 success of names like Workday (WDAY) and Concur (CNQR), and (3) Cybersecurity-- with FireEye (FEYE) the most blatant example looking to take advantage of a hot market opportunity, and (4) Too much "market potential" hype in new areas like 3D printing-- think 3D Systems (DDD) and Stratasys (SSYS). Now, while we have seen an extreme rotation shift away from momentum and toward value, that doesn't mean there is a full-on bubble in the market, particularly now that stocks are more in check. Particularly because these companies, like Amazon (AMZN), Netflix (NFLX), Facebook (FB), Priceline (PCLN), and OpenTable (OPEN) are extremely profitable with large market opportunities. This is not a case of overall phantom companies. Are there worries in the market? Most notably, of course, international uncertainty, led by the turmoil in Ukraine. But that's how you make money, climbing the wall of worry.
Now, when we think about the potential of a correction, I would be much more worried if the momentum names were the only groups leading the market, leaving the blue-chips in the dust. After all, a momentum-driven market can get frothy. Some say the valuations of blue chip and defensive names have the potential to drop precipitously as valuations have gotten so high as a result of the rotation into safety. But these are companies with huge amounts of cash at hand that can up their buybacks. Apple's (AAPL) buyback program, largely prompted by Carl Icahn, is in fact one of the many reasons the stock has outperformed.
So what to do here? It is still too early to jump into the momentum names. It is too treacherous. But keep your shopping list of best-in-class names, particularly the ones with strong earnings power and good management like Amazon (AMZN) and Google (GOOGL). Yes, we are seeing a bottoming in some names like Twitter (TWTR) for example, particularly given its current $20bn valuation relative to recent takeovers like Whatsapp and the lockup news finally in rearview. But at this point, particularly with first quarter earnings reports ending, there is no real catalyst for these shares and they likely should remain weak through early summer until the next round of data points. And in the meantime, ride the wave of the defensives. Because that is what is working in this market and will continue to work for some time.