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Recent Stock Climb Has Cautious Flavor

16 August 2012 in Trading Ideas

A funny thing about the recent surge in equities that has seen the market climb more than 7% since June 1 — investors are apparently thinking harder about where they’re putting their money.

An article in the New York Times last weekend suggests that unlike previous rallies, which have seen a full-out investor embrace of stocks, regardless of sector, this new “risk-off” bullishness speaks to a more nuanced way of thinking.

As the Times reports, traditionally defensive sectors like telecom and consumer staples continue to outperform the S&P 500 Index. But within certain industries, more economically sensitive sector groups like broadcasters, apparel retailers and real estate investment trusts are leading the market, according to data from Morningstar.

“It tells me there’s a clear preference among investors to take on more risk, but in a more thoughtful way,” Mark R. Freeman chief investment officer of Westwood Holdings, told the Times, noting that in the last year or two, it almost seemed that a switch was flipped in the market. “Before, the attitude was, ‘Greece just got a new prime minister — let me buy the basket of stocks with the highest global cyclical exposure.’ ”

Part of this selectivity also seems to have translated to market-cap sizes. As Bespoke Investment Group’s blog recently noted, the trend of the past several years has been an outperformance by small-cap stocks during broader market rallies and an underperformance during selloffs.

That isn’t happening now: As of Tuesday, the S&P 500 was up 12.1% so far this year, while the Russell 2000 was up only 8.2%. But that gap only really began in the past month. Since July 17, the S&P 500 has climbed 4.2%; the Russell 2000 is up less than 1%.

Bespoke points out that investors focusing on mega-caps like Apple (AAPL), Google (GOOG), General Electric (GE) and Wal-Mart (WMT) have bested traders betting on undiscovered small-cap stocks.