Don Hays' commentary
So far, the scenario is exactly on track. The NASDAQ had more
stocks making new highs yesterday than anytime in the last year,
and that is a good sign. The broad-based Value-Line Arithmetic
average has been consistently making new all-time record highs, and
that also is a good sign. As we suggested a week ago, the market is
poised for a "spirited" rally, possibly pushing the Dow to a high close
to 11,600 by the third week of July. We believe this will be the last
rally before a more significant sobering up will come.
That sobering up should be predicated either on concerns about the
Fed's August FOMC meeting with commodities moving up, concerns
about Y2K approaching, or growing concerns about 3rd quarter
earnings. BUT, with the broadening out of the market, we will be
watching the action closely for clues that something very unorthodox
is occurring. We will be watching closely the action of the dollar, and
the international markets.
You see, even with the new upside action we are seeing a very
definite change in the bull market's personality. The Value-Line
Arithmetic average has taken the role as the market leader, instead
of the distinct laggard role it has held for the last three years. With
the S&P 500 still at its highest valuation in history, by far, we believe
a decade of underperformance is facing those large-cap stocks. They
have enjoyed a decade of downsizing, merging, acquiring, buying
back their stock, and cutting back on expenses, and we suspect
they have about run out of fat to cut. The technology phenomenon
has worked its magic on earnings progress for large cap stocks. But
even though small cap stocks (which also typifies the average US
stock) have been ignored, a plot of their earnings progress shows
that their earnings have more than kept up with their large-cap big
brothers.
So if earnings have kept up, while the prices have not, the
price-earnings ratio for the small-cap issues is still very modestly
valued. Even at that, it is extremely rare that small-cap stocks act
good if large-cap stocks are weak, so our concerns about the
large-cap portion of the market is putting a damper on our overall
opinion. But we are watching the action after this rally runs its
course, which we suspect will be subsequent to the July 17-20, 1999
juncture.
The same applies to the international arena. When the US catches a
cold, usually the rest of the world catches the flu. So overall, to
repeat our statement of last Wednesday's market comment, "It's
okay to go out to play, but don't stray too far from cover, and keep
your umbrella's handy." |
