Worries over the potential impact on a reported plan by the Federal Trade Commission to probe into past acquisitions by certain FAANG companies sucked the air out of a budding rally in stocks today. The Dow Jones Industrial Average finished flat. Microsoft (MSFT), a fellow tech megacap, fell 2.2% for its worst showing in 2020.
XVolume jumped on both main exchanges.
While the Nasdaq composite's morning gain of almost 0.9% dissolved into a fractional loss, the tech-heavy Nasdaq 100 fell almost 0.2%. Both key equity indexes rose to new all-time highs.
The S&P 500 reversed from a 0.7% intraday gain to end 0.2% ahead. However, small caps did reasonably well.
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The Russell 2000 rallied nearly 0.6%. The small-cap S&P 600 gained 0.7% and retook its key 50-day moving average, a bullish sign.
Within the IBD 50 stock list itself, Lumentum (LITE), China's New Oriental Education (EDU) and Vertex Pharmaceuticals (VRTX) showed leadership-type mettle with gains of 1% or more.
Large Caps And The Dow Jones: Buybacks Still A Key Advantage?
Ken Berman, president and chief strategist at Gorilla Trades, notes that large and mega-cap stocks have outperformed their smaller brethren since the market's bottom in the fourth quarter of 2018 with the help of massive share purchases. Very low interest rates have helped fuel these buybacks in addition to acquisitions and capital investments.
While the S&P SmallCap 600 has rallied nearly 32% from its December 2018 low of 793, the S&P 500 has gained 44% over the same time frame, excluding dividends.
If the novel coronavirus escalates into a serious long-term drag on China's economy, Berman argues this could benefit large-cap stocks as well. Why? "Concerns about the global economy could help keep interest rates low," Berman told IBD in a phone interview. "We've seen huge inflows into ETFs, particularly into large caps, and this tracks historical trends. Bull markets tend to narrow in breadth as the market's run matures."
Five catalysts could derail the heavy accumulation in companies with market values exceeding $100 billion, according to Berman: rising interest rates, stronger global economic growth, declining share buybacks, an uptick in inflation, and more risk-taking by equity investors.
Innovator IBD 50 (FFTY) added 0.3%, following Monday's 1.3% surge higher.
At the session high of 36.82, the growth-oriented exchange traded fund has climbed 6% since Jan. 1. That towers over a 3.1% gain by the 30-stock blue chip Dow industrials.
Bullish Action In Telecom Gear Firms
Lumentum is extended after a strong bounce off its rising 50-day moving average nearly two weeks ago.
That test of the 50-day line near 76 (or off the 10-week moving average at around 78) offered a follow-on buy point.
Amid the growing scope of coronavirus contagion and the impact on the China economy, New Oriental continues to act well after a solid test of support at its 10-week moving average last month.
The for-profit school operator muscled past stubborn resistance near 100 in the summer of last year. Back then, it cleared a cup without handle that offered a 98.09 buy point. Since then, shares have risen as much as 44%.
Beating The Dow Jones
Vertex has been showcased multiple times on Leaderboard, a curated list of CAN SLIM-type market leaders for stock pickers eager to find individual companies with the potential to outperform the general market.
The leader in medicines to treat cystic fibrosis returned to a half size position on the Leaders list on Feb. 5, after it tested institutional buying support near the 50-day moving average as well as an alternate entry point at 225.76.
Please see the annotated daily chart of Vertex to see why the pullback last week was normal action for a true market leader and how it gave investors a second chance to grab shares after it cleared the narrow, tight consolidation.
Such tight price areas are referred to as a "shelf" on the IBD Live show.
After the close, Lattice Semiconductor (LSCC) and ride sharing innovator Lyft (LYFT) reported quarterly results. Lattice moved little in the after-hours session despite reporting a 113% jump in non-GAAP earnings of 17 cents a share, on top of a 700% vault in EPS in the year-ago period. Q4 sales edged up 4% to $100.2 million.
Lattice is trying to form a new base after its short-lived breakout past a 21.68 proper buy point in an amorphous base stemming back to mid-September. The four-month pattern proved too deep to be called a flat base. Support near its 40-week moving average (the black line on all IBD weekly charts and on MarketSmith) would be bullish.
Lyft Net Loss In Q4 Grows
Lyft slumped 5% in extended-hours trade despite posting a 52% leap in fourth-quarter revenue to $1.02 billion. The San Francisco-based company still bled red ink, losing $356 million. That well exceeded a net loss of $248.9 million in Q4 2018. Read the full earnings story here.
The stock has made a respectable rebound since bottoming out at 37.07 in October.
However, the stock still trades more than 35% below its 52-week and all-time high of 88.60. So a conventional buy point spurred by a breakout is still well out of sight.
Please read this Investor's Corner on how stocks must first clear an overhead supply of potential sellers as they bottom out and form the right side of a bullish base, including the cup with handle, flat base and double bottom.
See the full earnings calendar here.
Please follow Chung on Twitter at @SaitoChung and @IBD_DChung for more on growth stocks, buy points, sell rules, breakouts, chart analysis and stock market insight.
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