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Market historians will recall the term “Nifty 50” originated in the 1960’s bull market to describe 50 wildly 
popular large-cap stocks at the time. Interestingly, some of the same names from that list are leading the market higher today. The question for investors, of course, is what this selective advance means for the markets going forward.
The above are edited excerpts from an article* by Charlie Bilello, Director of Research (pensionpartners.com) entitled The Nifty Fifty Market.
The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and the FREE Market Intelligence Report newsletter (sample here; register here) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Bilello goes on to say in further edited (as noted) excerpts:
You wouldn’t know it after reading any major financial publication yesterday, but the average U.S. stock is DOWN over 1% thus far in 2014. How can that be if we’re being told almost daily that the Dow and S&P 500 are hitting new all-time highs? The answer is likely to surprise you, especially if you have been focused solely on the large cap space.
Massive Divergence Between the Largest Capitalization Stocks & the Rest of the Equity Market
There is a massive divergence going on between…the largest capitalization stocks and the rest of the equity market. As the table below indicates:
- the 50 largest stocks in the Russell 3000 are up 4.1% in 2014 while the average return for the rest of Index (51-3000) is -1.1%.
- the 50 largest stocks in the small cap index (Russell 2000), which peaked back on March 4, are up 3.8% while the rest of the index is down -4.9%.
There has been a nearly perfect relationship in 2014 between the size of a company and its return. The Chart below speaks for itself but I’ll make one comment on it anyway. The largest 500 stocks are up +2.7% since March 4 while the smallest 500 stocks are down -14.7%. That is a truly incredible spread.
Today’s “Nifty 50”
The table below shows the Russell 3000 stocks with a market cap greater than $50 billion and returns greater than 5% year-to-date. The highlighted names were in the original Nifty 50, including Johnson & Johnson (JNJ), Merck (MRK), Walt Disney (DIS), Schlumberger (SLB), and PepsiCo (PEP) among others.
The question for investors, of course, is “What does this selective advance mean for the markets going forward?”
- Is it merely a benign rotation into cheaper mega caps or
- a harbinger of more difficult times ahead?
Many seem to be arguing the former, using the fact that the major indices are still hitting new all-time highs, and the trend is still up, to make their case. Indeed, extreme bullish sentiment here confirms that most investors don’t seem to be bothered by the fact that the average stock has not been participating this year.
While it is hard to argue with these bullish investors (who could argue with “all-time highs”?), it is also hard to simply ignore the message that this selective advance is sending.
In my view, that message is clear:
- The larger, institutional players are systematically rotating out of illiquid small caps names and hiding in names with the highest liquidity.
- They are at the very least anticipating a more difficult market environment to come and likely something more severe.
This defensive rotation is not simply from small to large, but can also be seen across sectors (Utilities are the top performers in 2014, Consumer Discretionary bottom performers) and asset classes (Long duration Treasuries outperforming stocks and intermediate-term Treasuries).
While the S&P 500 has ignored this defensive rotation thus far in 2014, the average stock has not. Some food for thought next time you read about those “all-time highs.”
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://pensionpartners.com/blog/?p=360; © 2014 Pension Partners, LLC – All Rights Reserved. (This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.)
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