Cary,
I think you have correctly grasped the dominant metatrend in today's economy, which is the substitution of technology and information for certain other inputs in the production function, namely raw land, unskilled labor, non-human capital. Your portfolio has reflected this, with a heavy emphasis on IT infrastructure. Unlike most investors, you are thoroughly grounded in value discipline and refuse to buy unless you are getting a bargain. You correctly perceived bargains in the semi-equip sector last summer, and bought while most institutions were dumping them.
Now that this sector is looked at in a somewhat more favorable light, you seem to have joined the camp that believes the market as a whole may be overvalued. <<The "indicators" are high valuations, the attractiveness of mutual funds to the general public, the "idea" that a fundamental change has occurred in the business cycle, the economic "generals" fighting the "last war" (inflation), and, most recently, the shift from "quality" to the "cats and dogs" (euphemistically called "small caps").>>
It is one thing to try to correctly time the purchase of individual stocks. It is quite another to time the sale of a bull market, the strongest and longest lasting bull market that has yet been seen. I would encourage you to elaborate on the laundry list of indicators you have mentioned and flesh out the details of your still incohate and unconvincing argument. If it will help, I am perfectly willing to play the devil's advocate.
I do believe "you ain't seen nothin' yet"!
Mutual funds are quite popular for a reason. They are probably the most efficient vehicle yet created for allowing ordinary middle class people to easily accumulate an efficient portfolio, even if they only had a few dollars to start with. Now they can fully participate as investors and as capitalists. Nothing wrong with that. Expect this trend to rapidly spread to other parts of the world.
Market at high valuations? Psshaw! You are forgetting that interest rates are near record lows so future earnings need not be discounted as mightily as they were previously. As you correctly point out, disinflation is taking place, a most salutary situation for most people. FRB and Greenspan should be congratulated for ably steering the ship. I don't think the generals are fighting the last war. Tough talk and sometimes action is necessary to get the confidence of the bond market. Their mission is to lean against the prevailing wind in order to stabilize the ship. These guys know exactly what they are doing.
Shift from big to small caps. So what? Normal sector rotation from overvalued to undervalued. Show me that this is precursor to disaster.
It sounds perfectly rational and long overdue to me.
OK. Let's hear some substance. How would you go about proving that the market is overvalued? And what is the significance of such a finding even if it were true? I have long thought that the final phase of any bull market is one of extreme speculation. Smaller stocks, which are usually thought of as being more speculative, have only been outperforming the blue chips for 10 days. I don't yet see the speculative excess that normally marks the immediate precursor to the endgame. The smaller stocks have only just begun to see the light of day IMHO.
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