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If you own some of the large-cap blue chip stocks on the Dow, it has not been a great year so far. Now, some of you may have thought that after the strong year for technology and small-cap stocks in 2013, the stock market may have been ready to pause in the pursuit of higher-risk assets this year. So far, that has not been the case.
Technology and small-cap stocks are again leading the broader stock market this year.
The small-cap Russell 2000 is up 1.18% in March and 2.87% this year as of Tuesday, easily outperforming both the S&P 500 and Dow. Blue chips are taking it on the chin with a 1.39% decline to date this year and only a 0.15% rise in March. Only the 3.31% advance by the tech-laden NASDAQ is beating the Russell 2000.
What the results in the first quarter suggest is that the appetite for risk that was prevalent in 2013 is continuing to hold as stock market participants seek out the potential for higher returns.
At this point, I continue to favor small-cap stocks and technology growth plays, as long as the economic renewal remains in play and the broader stock market advances higher.
There’s also a sense that we are seeing some new money coming into the stock market this year that may have been on the sidelines in 2013 and missing out on great returns. The trading volume is higher, which suggests more money is coming into the stock market and much of that is chasing the potential of higher returns with growth stocks.
Now while the potential gains from small-cap stocks are far greater than holding the likes of General Electric Company (NYSE/GE), also keep in mind that the associated risk is much higher and small-caps are more vulnerable to downside moves or corrections in the broader stock market.
My view is that under the assumption that the economy will continue to grow, I see small-cap stocks and technology as the areas for growth in 2014.
Play small-cap stocks or play via the iShares Russell 2000 (NYSEArca/IWM) exchange-traded fund (ETF) if you want to match the index.
On the technology side, the NASDAQ is at a 14-year high and within 19% of its all-time high set in early 2000. If the stock market continues to advance, we could see a test at 5,000 sometime in 2015. My view is that the technology sector will continue to offer the best buying opportunity going forward, especially in the growth areas of mobility, Internet services, and social media. Just be careful not to chase stocks after surges and wait for weakness.
A good ETF play on the technology sector is buying the NASDAQ 100 or the Technology Select Sector SPDRA (NYSEArca/XLK).
By George Leong
