TALKING POINT-Little guys lag in Wall Street rally
By Marjorie Olster
NEW YORK, July 15 (Reuters) - The narrow focus of Wall Street's blazing
summer rally may be setting up a sharp decline in coming months unless
smaller stocks start to chip in.
While the three main stock market gauges -- the Dow Jones Industrial
Average, the Nasdaq Composite and the S&P 500 -- catapulted in tandem to
new records on Tuesday, small and mid-size shares remained well off
their bests.
In contrast, the Russell 2000 index of smaller stocks and the S&P 400
mid-cap index stayed well below their all-time highs and have trailed
large cap indices significantly this year.
''The risk is that the blue chips are at new highs but the broader base
is lagging and it's an unhealthy kind of divergence,'' said Richard
McCabe, chief technical analyst at Merrill Lynch.
As of Tuesday's close, the Dow industrials were up about 7 percent from
a recent low on June 15 and have risen about 17 percent since the year
began.
The Nasdaq composite was up 15 percent from its June 15 low and 25
percent year to date while the S&P 500 gained more than 9 percent from
the June lows and 21 percent so far in 1998.
In contrast, the Russell 2000 index of smaller stocks was up less than 6
percent since June, only 5 percent since January and still stood 7
percent below its April 22 record high. The S&P400 mid-cap index is 3
percent shy of an all-time high.
Market watchers caution the trend is unhealthy and if it continued,
could serve as the prelude to a big setback.
''The theory is when the generals advance, you want to see the troops
following,'' said Joseph Barthel, chief investment strategist at
Fahnestock & Co.
''When you simply have the generals advancing, in the past other markets
have ended poorly,'' Barthel said. ''Eventually what happens is the
market usually suffers a sizable decline to bring everything back in
order.''
Analysts like Barthel note that market breadth, a closely watched
barometer of a rally's strength, has failed to match the record-breaking
streak of leading stocks.
Since the June 15 lows, the Big Board has posted about 4,000 net
advances. But that is still 10,000 net advances below its most recent
peak on April 3, Barthel said.
Some disputed the significance of the current divergence.
Jonathan Dodd, technical analyst at Morgan Stanley Dean Witter, said
market breadth and smaller stocks often lag the market leaders on a move
up and he didn't see the current picture as negative.
''You don't have to have things going together at the same rate at the
same time,'' he said. ''This would have to go on for months more.''
Despite the ''unhealthy'' nature of the divergence, McCabe and others
said the current rally has probably not peaked yet and smaller stocks
may still catch up, restoring the kind of market harmony that puts
investors' minds at ease.
For one thing, interest rates remain low and may go lower still,
providing a key buttress for stock prices.
''As the underlying environment remains as good as it is, which is a
neutral or accomodative Fed and stable or declining rates, you have a
better than average chance of seeing these kinds of divergences resolve
themselves to the upside,'' said Charles White, managing director at
Avatar Associates.
Bill Meehan, chief market analyst at Cantor Fitzgerald, said the narrow
focus of investors will hinder further gains.
''It will be difficult to power the market higher with fewer and fewer
stocks doing it,'' he said.
Analysts noted small cap and mid-cap stocks, while offering good value,
have lacked a catalyst to drive them higher. One possibility would be
falling short-term interest rates.
Unlike larger companies which can issue debt in the corporate bond
market, smaller cap companies often rely on banks to borrow at rates
linked to official short-term rates.
And while long term interest rates have come down significantly this
year, short-term rates have been locked in a narrow range.
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