Big money puts brake on stocks

The big money is calling a halt to the surge in stock prices. Declines in oil and metals prices are being seen by an increasing number of US fund managers and strategists as a signal to get out of riskier areas of the equity market.

And that means avoiding things such as Chinese initial public offerings (IPOs) and sticking to the boring stuff such as utilities.

The growing concern is that stocks had priced in an overly optimistic economic path, and the recent breakdown in commodities and shift in equities to safer industries like healthcare suggest a reckoning in coming months.

Prominent strategists at Goldman Sachs and Credit Suisse foresee better results for stocks less tied to the economic cycle.

Doug Cliggott, head of equity strategy at Credit Suisse, wrote: "Gone is the US equity performance profile that suggested bold optimism on growth."

Commodities have been at the forefront of the selling so far. Big rallies in hard assets such as gold, silver and oil ended in an ugly slump last week. Silver crashed 30% in its worst fall since 1980. Oil, which was until recently worrying investors with its sharp ascent, fell around 15%.

There are two schools of thought as to why commodities are slumping. One is that the US Federal Reserve's $600-billion programme to buy Treasury debt has helped investors divert funds to commodities and equities, creating a bubble in those assets, which is now starting to burst.

The Fed's stimulus to financial markets is set to draw to a close at the end of June. How markets will react is something of a wild card.

"Investors and market observers are divided over whether this is a big deal or not," said Cliggott. "Credit Suisse is in the 'it's a big deal' camp."

The other is that it is a sign of impending weakness in the economy. Copper, known as the "metal with a PhD" for its ability to act as a predictor for the economy given its wide-scale industrial applications, has hit a five-month low.

The reduced appetite for speculative investments has shown in the outperformance of defensive stocks, whose fortunes are less tied to the rise and fall of the economy.

The S&P 500's healthcare and utilities sectors were the leaders over the last month, rising 2.9% and 2.6%, respectively.

That's despite a 1.5% fall in year-over-year earnings growth in utilities in the first quarter, worst of the S&P's 10 sectors.

Healthcare, long a go-nowhere sector, has had a whopping rally. The sector has gained for seven straight weeks, and is up 14.9% this year, best of the 10 S&P sectors. Energy, down 7.8% in the last seven weeks, is the worst performer in that time.

EPFR Global, which tracks fund flows, said on Friday that global equity funds experienced their first outflow since mid-March.

Small and mid-cap stocks, which typically lead a strong market, have started to see their relative outperformance to large caps wane. Momentum indicators show the strength in S&P 500 is starting to decline as well.

There are also signs of fatigue in the IPO market after a flood of Chinese IPOs and leveraged buyouts at the start of the year. Shares of Chinese dating website Jiayuan.com fell in their Nasdaq debut, while social networking site Renren, dubbed "China's Facebook", reversed all its gains on its market debut and traded below its offer price.