Whether the recent shift to what some categorize them as ‘value’ stocks is the turn the market take to get to the top or not, only time will tell. But, as interests grow on stocks such as IBM, CAT, MMM, and others stable, high quality stocks, one must ask if this is the flight to quality?
The flight to quality occurs when the smart money is transferring those ran-up speculative stocks to the less sophisticated market participants, and beginning to put money into the stable non-speculative stocks such as the big capital stocks found in the DJIA 30, and stocks that are considered to be in the ‘value’ category.
In this phase of the cycle, many participants will be perplexed to see those high growth speculative stocks being sold off while the market indices are near or making new high. But if one studies the market closely, one can see those high quality stocks that are gaining smart money interests are the same stocks that have great influence on the market indices. This phenomenon (deception) occurs near the end of the bull market cycle.
Take a look at IBM recent price actions, IBM has been on a decline for almost a year until recently it has caught enough interest to push it above 190 and broke the down trend. If it continues to move higher and possibly get above 200 and into a new 52 weeks high territory, the DJIA will likely be near record high if not at record high due to the impact from IBM.
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Another Dow 30 stocks, CAT, is also showing price actions that could push it above the 100 mark and possibly make its way up to a new 52 weeks high above 116.
CSCO, another component of the DJIA is also making a move to higher level. Once it has moved above the 23 level and toward its 52 weeks high near 27, its price movement will help holding the DJIA near record high territory along with holding up other market indices.
And finally, AAPL, the most hated quality stock. Most have given up on AAPL for the reason it is no longer appears to be a growth stock. Instead, it is considered to be more of a value stock. As smart money continue to move back into this stock, it will pushed it back above 600 and possibly to its all time high level. Recent interests have caused the price to move above 539 and broken out of its consolidation zone. As AAPL move toward the 600 level, it will help compensate some of the downward pressure generated by the lower quality stocks on the market indices.
Eventually, the depressed prices from those non-value stocks will impose too much pressure on the indices for the limited number of quality stocks to compensate, and that is when the indices will finally fall. Until that has occurred, stay the course. Be selective, be defensive, and be cautious.
Disclosure: Long AAPL.
