bear market
August 29, 1998
HD Brous & Co., Inc.'s CROSSCURRENTS
Alan M. Newman, Editor
This edited excerpt from the August 24th issue has been posted to
coincide with receipt by snail-mail subscribers. The entire issue is
available via reprint or fax. Call us at (516) 773-1810.
Three weeks into a bear market, the indexing and big cap phenomenon
rages on, as fiercely as ever before. The pictured indicator (combined
NYSE & NASDAQ) measures breadth for 92% of the U.S. market and clearly
places the kabosh on any remaining notions that we might yet still be in
a bull market. Nevertheless, our page four chart shows the carnage
limited primarily to smaller issues. In fact, nearly all of the impact
of this absurd mania for the largest stocks is visible in both the
prices of the S&P 500 and of Nasdaq's top issues. Through June 1, 1998,
we have listed below the percentage changes for each of selected indexes
since January 1 of the stipulated year. Note: XOC = Nasdaq Top 100, SPX
= S&P 500, RUT = Russell 2000.
XOC SPX RUT
1998 +20% +12% +5%
1997 +45% +47% +27%
1996 +107% '+77% +44%
1995 +195% +138% +85%
1994 +199% +134% +78%
1993 +231% +150% +108%
In a prior mania in 1972, institutions and professionals similarly bid
up the shares of a select circle of companies known as the
"nifty-fifty." Such was the commitment to these few issues that they
became known as "one decision" stocks. Simply buy 'em and forget about
'em; they were destined to rise forever. They did not. Looking at the
Top 10 stocks listed in the Institutional Investor's magazine survey for
1972, these issues finally succumbed to an excess of zealous sponsors.
Since all had bought them, there was no one left to sell them to and
prices could no longer be supported. The ten issues were IBM, TWA, First
National City, Bausch & Lomb, FNMA, United Artists, Levitz,
Teleprompter, Burroughs and Ford. The group rose a mere 1.3% for 1972
against the S&P's gain of 15.6%, and then collapsed by 35.1% in 1973 as
the S&P 500 declined by 17.4%. Over the two year period, the favored
issues were crushed, down 38.2% against the S&P 500, which was down only
4.6%. In 1973, it was even worse, as the new Top 10 (IBM, Polaroid, ITT,
Teleprompter, Eastman Kodak, Gillette, McDonald's, Motorola, Digital
Equipment & Levitz) swooned by 67% over the two year period, far more
than the 41.9% drubbing in the much broader S&P 500. In much the same
fashion, a mania for favored issues has existed over the last three plus
years, and we are confident that the dichotomy will soon unravel as it
did more than a generation ago. Ironically, the "nifty-fifty" of
yesteryear equate to the S&P 500 and the Nasdaq 100 today and the S&P
500 of yesteryear equate to the Russell 2000 of today. Bear in mind,
today's arena is much, much larger than it was in 1972. GDP was only
15.1% what it is now, total market capitalization was only 8.5% of what
it is now, and most importantly, total dollar trading volume was only a
miniscule 1.2% of what it is today. The mania for the favored issues in
1998 should end precisely like it did for the favored issues in 1972.
The bears now have a Dow Theory bear market signal to buttress their
case. Both the Dow Transports and Dow Industrials broke their June lows
convincingly on July 29th and August 4th, respectively. The case for
declining prices is not completely assured, but bear market signals have
had been reliable in 20 of 23 cases since 1899, a 87% accuracy rate.
Despite the already comparative massive overvaluation of the index, the
S&P 500 again ran to a new cycle high last week vs. the Russell 2000.
The mindless accumulation of indexed and favored issues has now run to
the absurd. We probably have quite a ways to go before a bottom of
substance is achieved. |
