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Hurd on the Street, July 2015

Happy Independence Day!

To me, the Fourth of July is much more than an opportunity to enjoy our freedom. It is a day to remember and appreciate those who have made our freedom possible, celebrate their efforts, and reflect on the core values and principles of this great country that led them to serve.

The stock market indexes have moved slowly but surely into new high ground over the last month. This move has been led by strength in the Russell 2000 Growth Index, which has been hitting record highs. Year-to-date, the Russell 2000 Growth Index has a gain of 10.91% vs the S&P 500 performance of 2.48% - a great year for small caps thus far!

While the recent strength is encouraging, there are a few things that give me cause for concern. First, the activity in the IPO market seems to be reaching a speculative frenzy with inflated prices and the number of new offerings reaching levels not seen since the year 2000. A great example of this phenomenon is last week’s public offering of Fitbit, Inc., a manufacturer of wearable health and fitness trackers (ticker symbol FIT). This offering, which was originally priced to raise $448 million, was increased to $732 million, and traded up 48% on its first day of trading. Second, while the advance-decline is now in an uptrend, it has not confirmed the new highs in the indexes.

The good news is that individual and sector chart patterns themselves continue to look healthy and suggest to me that higher prices may lie ahead. For me, this is the most important consideration. Also encouraging is that recent sentiment numbers suggest investors have not become overly bullish when the markets make new highs. Very recently, banks have emerged as an attractive sector, led by strength in regional banks. They are a direct benefactor of rising interest rates. The information technology hardware and software sectors remain in favor as does the biotechnology group. We continue to be selective buyers on dips. Remember, “The trend is your friend”.

Disclaimer: Rocket Capital Management is a registered investment adviser. The comments presented do not constitute personal advice and are not intended to be a solicitation for the purchase of any individual securities or investment strategies. All investing involves risk. Please consult with a registered adviser before making any investment decisions.

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