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Strategies & Market Trends : Ask DrBob -- Ignore unavailable to you. Want to Upgrade?

To: Louis V. Lambrecht who wrote (58693)	5/5/2002 11:09:49 AM
From: stan_hughes	Read Replies (1) \| Respond to of 100058

Louis - Good stuff. I need to digest most of that information a lot more first, but in regard to your last quizzical about small caps - in my experience, the following is one of the top inviolable rules: when the micros start to go during a bull, the end is very near. Part of that is mechanical, because people turn to lower and lower quality stocks because the perceived 'good ones' have already been bid up, and they want to find the next rocket. In addition, bull markets get lots of media attention and progressively draw more amateurs into the market, and amateurs are much quicker to overlook (or not even see) the risks in lesser quality securities. The other part is fundamental, in that the 'business success' of the larger caps starts to trickle down to the lower levels of the economy and therefore the market, e.g. little guys start getting equipment orders. Furthermore, the draw on economic resources within the economy during a boom permits even non-competitive organizations to get a piece of the expanding pie. Secondary and tertiary industries start to pick up, which is also generally microcap land. Conditions evolve where even the third class materials and products from tiny companies fetch good prices. Meanwhile, the stock market is becoming awash with neophytes looking to get rich quick along with the hucksters, and the OTCBB goes crazy. The wheels come off when the demand for product begins to dry up a bit for lack of available funds at the top purchasing level (last go-round, it was the telecom sector). This stall in activity against a rising tide of production draws suppliers into lowering prices to maintain their positions. Cutthroat competition steps up, and the smallest kid on the block is the one who takes the biggest kick in the teeth under those circumstances. Life sucks if you're a microcap living on the margins of big cap prosperity. The normal sequence then, with a disclaimer that we're talking generalities: - microcaps are late to the party and a lagging indicator - when the large cap crack comes, they underperform because they are the weakest, have the most to lose, and some were scams anyway - as the bear matures, the large cap decline begins to catch up to the previously underperforming micros - measures taken to stimulate the economy (usually monetary policy shifts) begin to manifest themselves fundamentally at the grassroots microcap level, spawning a resurgence in small caps - the big caps finally throw in the towel, bringing the small caps back down with them - the big caps recover from this widespread capitualtion first, because they're still the most liquid stocks and they're still the market leaders in their respective industries, and therefore still in the best position to benefit during the next expansion - the process then eventually starts over again with a rising market, first of large caps So much for the theory - a big hassle IMO in trying to document it is that the indexes one might try to use to make the illustrations are imperfect, and the boyz are also constantly fiddling with and changing them around for one reason or another. For example, the 2,000 Russell stocks of today are not the same 2,000 of 3 years ago. Still, we have to work with what we've got.