Re: Birchtree's account talk
Ah, that wall of worry we all like to talk about. The ratio of the number of stocks rising versus the number that are falling has been getting worse since the spring, and the number of stocks at 52 week highs has been on the wane since last year. That's why I'm sticking with the C fund to ride out this next up cycle.
"The warning signs are there. One stark way to see them is to compare the performance of the Russell 2000, an index of 2,000 smaller stocks, with that of the Dow Industrials, the quintessential blue-chip index, made up of just 30 big stocks.
For most of the bull market that began five years ago, the Russell 2000 rose faster than the Dow, as its small, nimble companies benefited from low interest rates and a booming economy. Since Oct. 9, 2002, when the bull market began, the Russell is up 151%, while the Dow is up 89%.
Starting this past spring, however, they switched places. The Russell fell as consumer spending growth finally began to suffer, and as the housing crunch and troubled credit markets roiled the US economy. The Dow industrials, dominated by multinationala that benefit from global sales, are up 1.3% since the end of May, while the Russell has fallen 3% over that period.
When a bull market is young, and the economy is vibrant, small stocks typically outpace large ones. When the bull market gets older - five years is above average for a bull market - and economic growth starts showing fatigue, the number of stocks that can sustain their gains tends to shrivel. The biggest, strongest multinationals keep rising, pushing up indexes such as the Dow. Finally, as the biggest stocks peak and decline, the bull market tends to end.
That isn't inevitable, of course. But there are other, wonkier signs of below the surface weakness. Of the 500 stocks in the broad S&P 500, more than half were trading last week below their average levels of the past 200 days. The overall index, buoyed by its biggest stocks, still was trading above its 200-day average. So while the index looked fine, most of its components did not.
One big question now is whether the healthy job market and recent US export strength, helped by growth in Asia and Europe and a weakening dollar - which makes goods and servuces less expensive compared to foreign ones - will offset the negatives. Investors still widely expect the Fed to achieve a soft landing - preventing an inflation resurgence, while keeping the economy strong enough to escape recession. They hope lowrer Fed rates will boost demand and keep corporate profits growing. Whether the credit and housing markets, as well as incipient signs of inflation, will get in the Fed's way, and whether overheating foreign markets will cause problems for the US, are questions investors will be asking in the weeks to come.
While the overall stock indexes look strong, most of their component companies look less strong. Something similar happened in 1999, when the biggest global players held the index aloft as smaller companies fell away."
http://www.online.wsj.com/public/us
