Jim...Anyone.....comments...?........Did Bull Market Die On Wall Street?
NEW YORK (Reuters) - A curious thing has happened. The bull market died
in the spring of 1998 but Wall Street still hasn't been told at least that's what
some experts say.
The headline-grabbing stock market indices the Dow Jones industrials,
Standard & Poor's 500 and Nasdaq composite may be cruising at record
highs, but the truth is that many stocks have not kept up.
In fact, a big number of stocks are below the highs made in the rip-roaring
days of the 1997 and 1998 bull market.
``The overall market has been in a bear market since April 1998. Yes, that is
right 1998,' said Don Hays, chief investment strategist for Wheat First Union
in Richmond, Va.
It's a smoke-and-mirrors market.
``With only four technology stocks making up 25 percent of the weighting of
the Nasdaq and the media only concentrating on the indices, the 'Stealth
Bear Market' is being ignored,' he said.
``What do you think the headlines would be saying if the major indices were
19.7 percent under the mid-April 1998 highs?' he asked.
The experts backed up their words with some strong stuff.
Ned Davis Research in Venice, Fla., says the average stock in its
7,736-stock data base has fallen nearly 20 percent since April 1998 a virtual
bear market for a large number of stocks.
There's more.
Richard McCabe, chief market analyst for Merrill Lynch, found that 23.6
percent of the New York Stock Exchange's common stocks and 22.7 percent
of the Nasdaq market's stocks are below their summer-fall 1998 lows.
``The uptrend in the major market indices is misleading because it does not
represent what the majority of stocks have been doing,' he said.
People have been buying the big-name stocks, such as technology and
consumer growth companies, in the hopes that the sectors would stand up to
the downward pressures on earnings from the economic problems in Asia and
Latin America as well as the slowdown in Europe.
``Investors went for the rapid and proven growth companies and ignored the
medium and small stocks, which have been underperforming for more than a
year,' McCabe said.
``It's created a new breed of 'Nifty Fifty' the group of stocks that did well in the
early 1970s when the rest of the market was having trouble,' he said.
The Nifty Fifty stocks eventually went through a nasty period and they joined
the bear market that had been dogging the other stocks since the late '60s.
Was it the smart way to pick stocks?
``It was not the ideal investment,' he said. ``A good, steady and healthy
market is usually one where the vast array of stocks are doing well. But,
when it's a narrow advancing market, the risk is the majority of weak stocks
will ultimately bring down the minority of strong stocks.'
Some investors may be reacting to the warning signs.
The emotional intensity of the bulls has tapered off over the past few weeks.
The proof: The rallies have not generated a lot of new buying interest.
Also, mutual fund investors have reduced their stock holdings at the fastest
pace since December 1987. Back then, investors were still running for the
exits after the October crash.
The downsizing of stock portfolios started this summer. In July, investors
redeemed shares from mutual fund companies at an annual rate of more than
20 percent, according to the Investment Company Institute, a
Washington-based mutual fund lobbying group.
And, at the end of July, Fidelity Investment's Magellan Fund, the nation's
biggest mutual fund with assets of more than $100 billion, cut its stock
holdings to the lowest level in three years at 92.2 percent.
``A reasonable case can be made that what has been occurring
simultaneously over the last 16 months is a bull market in a minority of
large-cap issues and a bear market in a majority of mid- to small caps,'
McCabe said.
Has the bull market been built on shaky ground?
``There is little doubt, even in those partying 'tunnel vision' minds, that this
bull market is being carried by a small pocket of stocks mostly big-cap
technology stocks,' Hays said.
The good times have been rolling for the tech sector, which includes
International Business Machines Corp., Intel Corp., Microsoft Corp., among
others. In fact, the technology sector has jumped 32 percent so far this year,
after soaring 72 percent in 1998.
And, while the overall market was off 1 percent in August, the tech sector
climbed nearly 6 percent, which explains why the market, on the surface,
appears to be in a bull mode.
During the days of the Nifty Fifty, investors concentrated on a select group of
stocks with extraordinarily high price-earnings ratios of 40 to 80.
``Their philosophy was to find stocks that had been able to provide consistent
annual earnings gains, with the statement that you could buy these stocks at
any price and know that in the future, you would be bailed out because of
those persistent growth patterns,' Hays said.
How different are things from the 1970s?
Cisco sells at 70 times projected earnings and Microsoft is at 60 times future
earnings.
Hays said tech stocks now make up a huge 24 percent of the Standard &
Poor's market capitalization, which is up from 13 percent in 1997. In 1990, it
was just 7 percent.
Technology stocks, particularly the Internet group, are in a new era and for
that reason, Wall Street has no idea where the P/E limits should be for many
of those companies.
After all, the limits of a stock's P/E are largely decided by investors'
expectations of earnings growth and risk. In the case of the Internet stocks,
the sky seems to be the limit.
America Online is selling at 200 times expected 12-month earnings.
``We believe the next two months will be very chaotic and take those
perpetual grins off those who think the bull market is still alive,' Hays said.
McCabe said the market sell-off could take place in October.
``It has the reputation of being a 'crash' month for stocks but October is also
known as a 'bottoming' period because market weakness often sets the
foundation for recoveries,' he said.
``Then, there's the Y2K computer problem, which may provide the market with
an excuse for a setback in the big-cap stocks as we get nearer to the end of
the year,' he said.
McCabe sees a correction in the Dow of 10 to 15 percent.
For the week, the Dow Jones industrial average fell 224.80 points, the Nasdaq
composite index slipped 17.44 points, and the Standard & Poor's 500 index
dropped 16.23 points. |
