The Dow is the Least-Bad Index on a Down Day: Are Investors Fleeing Small Caps?

Markets give up all of yesterday's gains and more, but there's little method to the madness.

Apr 10, 2014 at 12:12PM

Investors hoping for a little consistency after yesterday's Federal-driven market gains have been sorely disappointed this far today as major indices reversed all the positive momentum built up yesterday. The Dow Jones Industrial Average (DJINDICES:^DJI) was the strongest of the three major American indices heading into the afternoon, but that's not saying much -- it's only down 0.4%, compared to a 0.8% decline in the S&P 500 (SNPINDEX:^GSPC) and a 1.8% plunge in the Nasdaq Composite (NASDAQINDEX: ^IXIC). No one seems quite ready to get over their fears of a slowdown yet, and momentum stocks are again dragging on the market, as evidenced by the tech-and-small-cap-heavy Nasdaq's deeper dive.

Longview

The Dow's more modest decline is helped primarily by the 1.1% gain in IBM. (NYSE:IBM), which is the second most heavily weighted Dow component and the second-best gainer of the day, behind a 1.5% gain for McDonald's(NYSE: MCD). IBM's uptick, however, was more than offset by a 1.8% drop in top-weighted Dow component Visa (NYSE: V), which was the worst among the Dow's eight triple-digit share-price stocks.

IBM continues the running trend of analyst updates moving key Dow stocks; this time, it's not an upgrade, but an initiation of coverage driving Big Blue's gain. Deutsche Bank now rates IBM as a hold, with a $200 price target, based on expectations that positive moves (share buybacks and margin expansions) will be outweighed by a challenging growth environment. Shares are already practically at the $200 mark, so today's move higher is probably just a short-lived relief rally. Hey, at least Deutsche didn't rate IBM as a sell! Big Blue this morning also announced its acquisition of cloud marketing specialist Silverpop for an undisclosed amount, which could be cheering investors hungry for any news of more moves into the red-hot cloud sector.

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Source: Dennis van Zuijlekom via Flickr.

Only about 135 of the S&P's 500 components were trading higher heading into the afternoon, with index leader Hewlett-Packard's (NYSE:HPQ) 2.6% gain more than offset by a 6.2% drop in Bed Bath & Beyond (NASDAQ:BBBY) and a 4.5% decline in the S&P's biggest megacap loser, Gilead Sciences (NASDAQ: GILD). Other major megacap decliners included Amazon.com (NASDAQ: AMZN) and Google (NASDAQ: GOOG) (NASDAQ: GOOGL), which dragged down the market-cap-weighted S&P 500 with respective losses of 2.9% and 2.9% (or 2.6% for voting-class GOOGL shares).

HP, like IBM, is also the beneficiary of new coverage from Deutsche Bank. The bank placed a fresh buy rating on HP shares and offered a $40 price target, which represents a further 20% upside for the erstwhile PC maker that is still in the process of a grueling turnaround. Deutsche views the turnaround favorably, and predicted that the company's "IT hardware portfolio" will be "well positioned for the next phase" of tech evolution. That's far from certain, and hardware-focused companies have largely been shredded by razor-thin-margin Chinese competition since the turn of the century, but for today, investors can at least enjoy some positive sentiment.

Bed Bath & Beyond, on the other hand, failed to go beyond analyst expectations with last night's release of fourth-quarter earnings and first-quarter guidance. The specialty housewares retailer reported earnings of $1.60 per share, in line with expectations, but on slightly lighter than expected revenue of $3.2 billion (against a $3.22 billion consensus). Same-store sales rose an anemic 1.7% in the quarter, and its first-quarter profit forecast falls in a range of $0.92 to $0.96 per share, well below the $1.04 consensus. As a result of this weak forecast, Merrill Lynch downgraded Bed Bath & Beyond to hold and reduced its price target to $72 per share. Two other analysts lowered their price targets as well.

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Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Bed Bath & Beyond, Gilead Sciences, Google (A shares), Google (C shares), McDonald's, and Visa. The Motley Fool owns shares of Amazon.com, Google (A shares), Google (C shares), International Business Machines, McDonald's, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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