In Today's Market Cap:
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The Day Ahead: A most important session
Well, the great bull market delivered on its promise following its very
dramatic late flourish going into yesterday's close. The fact that the
market actually rallied so strongly inspite of seeing the highest
levels of interest rates we have seen in since the middle of last year
and is testimony to what I have been saying for a while in these pages.
The market continues to act strong in the face of sharply rising
interest rates and may continue to do so for a while.
The fact that the economy has been overdelivering on performance in a
way puts something of a safety net under the market and as also
suggested, if we were to actually rally strongly ahead of Friday's
employment report, it would be a very encouraging sign. So what will
the actual news do for Bonds and the market. That is a tough call, but
our original thoughts that the market might just dip below the 120
level on the March US Treasury Bond futures, might just be the ticket,
coinciding with a yield roughly equivalent to 5.75%.
The news could come in a bit better than expected, say 300,000 new jobs
and that might be interpreted as good for the market, indicating a not
too strong or hot economy. A higher number might temper things a bit,
but the key really will be the performance of the bonds.
The key development today was a sharp rise in the Utility index, up
4.14 points to 297.11. Why is this happening as Bonds are making new
lows? Sometimes one sector will lead the other. If Utilities are
forecasting a rally in Bonds tomorrow, this market could explode
higher.
Bonds were giving off the same kind of preliminary buy signals today
that Dell saw late yesterday. I am just using Dell as a similar example
of something that has been recently beaten up like Bonds.
Realistically, the most logical play might be a sharp spike down on or
before the news followed by a sudden reversal, that would really lead
to a very strong rally.
The technicals of the market tend to suggest that a continuation of
today's strong rally is on the cards. Nothing is cast in stone, however
and Friday will likely be a very important day, because how tomorrow
plays out will definitely set the trend for quite a while. And, if that
trend remains positive, the projected length and intensity of such a
rally will have CNBC hurrying and scurrying around trying to arrange
for special guests to appear on their once in a lifetime 10,000 Dow
Special show. Solid follow-through action could make this a reality.
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U.S. Stock Market Summary: Stocks rally amid tech deal
U.S. stocks took off in late trading Thursday, to close strong for the
session. Ttrading volume was below normal for the 18th-straight day as
some participants took few chances ahead of Friday's February jobs
report release.were Investors placed bets ahead of Friday's release of
February jobs data.
Although the Blue ship syocks had a high flying session, gains on the
Nasdaq were kept in check by investors' lingering concerns over the
near-term earnings growth outlook for the technology sector.
The Dow Jones Industrial Average was ahead 191.52 points, or 2.06
percent, at 9,467.40. The Nasdaq Composite closed 27.84 points, higher
at 2,293.04, a reversal from a morning rally and a mid-day pullback
shows signs of weakness. The S&P 500 index climbed 18.95 to 1,246.65, a
gain of 1.54 percent.
IBM (IBM) and Dell Computer (DELL) outlined plans for a seven-year
strategic alliance valued at about $16 billion. For inclusion in its
PCs, Dell will acquire technology related to data storage,
microelectronics, networking equipment, and monitors. The deal also
gives Dell future access to IBM's advanced semiconductor technology.
The companies will cross-license patents and work on future products
together. Dell shares gained just 15/16 to 81 7/8. IBM stock advanced 3
15/16 to 170 11/16.
Meanwhile, other computewr makers did not fair well. Compaq Computer
(CPQ) lost 5/8 to 33 1/4 and Gateway (GTW) fell 1 13/16 to 67 5/16.
Retailers looked stronger after releasing February same-store sales
results. Of the Big Five retailers, Wal-Mart Stores (WMT) rose 2 to 89
3/8 after reporting a 10.3 percent rise in same-store sales.
Energy stocks pushed higher for the second day, as crude oil changed
hands at levels not seen in seven weeks. Reports of a drawdown in
inventories aided the stocks Wednesday.
Meanwhile, Internet-related issues slipped as volume dried up in many
of the shares. The group has been the standout in the technology sector
over the past two weeks.
Intel (INTC) lost1 5/16 to 113 3/8. Gruntal lifted its rating to
"strong buy" from "buy." After the close Intel announcd the acquisition
of Level One Communications. Level One was downgraded today and dropped
5 1/4 to 27 1/4. Nice job on that downgrade.
Gruntal also tacked a "strong buy" rating on Micron Technology (MU)
shares, lifting them 2 1/4 to 54 7/8. The broker had previously rated
the stock a "buy."
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Special Report: What's up with small caps?
There is an interesting situation that has taken place that is ignored
to a great extent by the financial media. Large cap stocks like those
in the S&P 500, and tech stocks (particularly of course the internet
stocks) have made a huge move to all time highs since the drop last
summer. But small cap stocks have not. In fact the difference is
striking. While the S&P 500 is right near new highs, the Russell 2000
small stock average is down 16% from it's all time high last May, and
S&P's own small cap average is down fully 19%. For 1998 as a whole,
though the Dow and the S&P had double digit gains for the year, the
Russell 2000 average was *down* 3.5%.
This phenomenon of the small caps trailing is not new. It actually
began about 3 years ago. Up until then, the bull market that started
after the Gulf War in 1991 has pretty much moved in lock step. But they
began to diverge in early 1996. The drop and then the swift recovery of
the large averages has just exacerbated the situation.
Right now we truly have a two tiered market, where the vast majority of
small caps are at least in a correction phase, if not a bear market,
where their larger brethren have continued the bull move that began 8
years ago. What's going on here? Why are the large caps trading at
record prices while the small caps look like the bargain of the decade?
There are several factors that are causing the divergence, but two are
really significant.
The primary one has been indexing as it has been extolled by the
financial press. It was shown that over the last few years, if you put
your money in a low fee S&P index mutual fund, you'd out perform 80% of
stock mutual funds over that period. Despite the question of the
intelligence of putting more and more money into an already overpriced
large cap sector, this has become a mantra for a generation of
investors. No analysis is required, just invest in the S&P 500. This
has led to the huge growth in these funds. The Vanguard S&P 500 fund
now has over $50 billion in assets, making it number 2 in assets among
all 8000 or so mutual funds. There have been a number of questions
raised about whether this is really healthy or a smart way to invest
over time, yet it continues to be immensely popular. If and when this
method has a few bad years of performance, we'll see if it was a really
great idea after all.
The other factor has been the mania in internet stocks. Small investors
usually are drawn to small caps. But right now it's an amazing
fascination with anything connected to the internet. The outrageously
high prices that are accorded to these stocks are almost unbelievable.
It is probably going to be remembered as the tulip bulb craze of the
late 20th Century.
People also point to the global future potential of these groups of
stocks versus many small caps, and the big merge and acquisition deals
that are being done both in the internet and large cap arenas. Both of
these areas are drawing in much of the excess capital, leaving the
small caps languishing at Ben Graham value type levels. While the
average S&P 500 stock trades at a p/e of more than 30, it's not at all
unusual to find small caps trading at 1/2 that.
So what now? Well in the history of the stock market, there have been
several times that the large and small cap stocks have diverged, and
it's always been unwound. It's likely that this will happen again. The
two most important questions are when, and how.
When it happens is anyone's guess. There have been divergences like
this before that lasted many years. During the 1970's it was the small
caps that out performed the big caps, and that lasted from the bear
market of 1974 until the end of the decade. But probably the more
important question is how. There are two ways this can happen. The
small caps could 'catch up' to the big caps. This could lead to a
furious rally in the small cap arena unlike anything we've seen
recently. Or it could be a much more ominous matter of the big caps
'catching down' in a correction, or even a huge bear market where the
big caps drop 40% and the small caps are 'only' down a relatively tame
20%. Which it will be is anyone's guess, but this divergence bears
watching, for the fate of the markets for the next many years may hinge
on it.
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