Stuart, you've been reading that Roaring 2000s too much my friend. An economy in which 90% of businesses operate as efficiently as Dell would be disastrous in the medium term. It would create too much production capacity and we'd in the same shoes as China.
Most people don't know this, but mutual funds experienced a net out flow for 3 weeks in February and even now the inflows are half of what they were a year ago. Why is that and why have the indecies not crashed yet? In the past such change in the flow of funds would have killed the market. But now the market actually moves up even as the internals deteriorate. You should wonder why. Things are hardly what they seem.
My theory is that people are fed up with their mutual funds. More than 90% of the funds underperformed SPX and many did so badly. Meanwhile the high flyers are on CNBC every day and give the illusion that everything is going thru the roof except your mutual funds. By now most people know that this is a big cap market and that only a few stocks are holding the averages up. So the ones who can be active in the market have decided that rather than pay the fees to their mutual funds, they should just go out and buy the super performing big caps and the internets. Doing so, they've concluded, is far better than buying the funds (actually I tend to somewhat agree). There is now $7,000,000,000 worth of stocks traded by "independant" day traders. In terms of volume, individual traders make up 1/6th of the daily volume of the market. I know many of these people. Many of them are housewives and secretaries with a lot of spare time. Others are "professional" day traders. Those who cannot or do not want to play the stock market, just send their money to a Vanguard index fund, probably the SP500. This is why in my opinion you are seeing huge deterioration everywhere in the market, except in the very very big cap stocks and the internets.
So far this approach has rewarded people. But this is turning into a huge bubble and a musical chair if forming as fewer and fewer stocks go up (but by large amounts) and more and more stocks fall to the floor. In a normal mini-bubble, you get a correction and resume your uptrend after a 20% drop. But if things continue in this vein, it indicates that the professional money managers too are flocking to the few performing stocks so as to maintain the performance of their funds as well as their jobs. When that happens, you are set for a repeat of DJIA 1929~1935, or 1968~1974, or Nikkei 1989~1999.
Thread carefully. There is a reason why they say "corrections" are good.
Good luck,
Sun Tzu |
