It’s a Two Tier Market

(Like it or not)

If you are in the Tech and Net stocks, you are making money in this market, despite the fact that these stock sell, in many cases, at five hundred times sales and don’t have a prayer of seeing the first sign of a profit in the foreseeable future. Right now, they are the leaders. These T&N stocks have taken the S&P and Nasdaq market to new highs. There are only a handful of them, but they have done a job.

For the vast majority of stocks traded on the New York Stock Exchange and on the Nasdaq, it’s been a miserable year. In a recent fax from Dr. Ed Yardeni of Deutsche Bank, Alex Brown, he said that “the bull market has become narrower and narrower with close to 70% of stocks traded on the NYSE trading below where they were a year ago.” He estimates that stocks are more than 50% overpriced based on forward consensus earnings estimates. This is putting it on the line and saying it as it is.

We have been running some weekly numbers of the stocks that have advanced and those that have declined, plus those that have been making new 52 week highs and those that are making new lows. These numbers are tabulated below and make an interesting story of what the market is really doing vs. what the averages are telling us:

WEEKLY STATISTICS

ADVANCE/DECLINE – 52 WEEK HIGHS & LOWS – DOW GAIN / LOSS

Week ending

Advances

Declines

Difference

Highs

Lows

Differences

%Dow

12/10

1134

2340

-1206

241

884

-642

-0.54

12/03

1620

1853

-233

162

780

-618

2.71

11/26

964

2472

-1508

121

576

-455

-0.14

11/19

1655

1783

-128

216

423

-207

2.18

11/12

1547

1899

-352

186

341

-155

0.6

11/05

2098

1350

748

198

312

-114

-0.25

10/29

2275

1198

1077

166

706

-540

2.5

10/22

1690

1721

-31

83

896

-813

4.5

10/15

714

2797

-2083

90

814

-724

-5.9

10/08

1770

1642

128

137

450

-313

3.67

10/01

1854

1609

245

106

597

-591

-0.06

9/24

767

2668

-1901

91

659

-568

-4.85

9/17

1021

2394

-1373

136

505

-369

-2.04

The column depicting the weekly differences between the new highs and new lows is of particular interest. In each of the last thirteen weeks, there have been a significant number of new lows compared to the new highs. Even in weeks where the DJIA has been up by several percentage points this has held true. In fact for the week ending December 10th of the 3690 issues that traded, 884 or 23.9% of them were at new lows. Couple this with the fact that the Advance/Decline line has been moving steadily lower since April of 1998. What this means is that the vast majority of stocks, on all exchanges and the over-the-counter market, have been in a bear market for the better past of the last eighteen months.

Unfortunately, the general public is only hearing the good news of the daily new record highs in the Nasdaq or S&P 500 averages. The bullishness on the part of the “talking heads” on CNBC and other financial broadcasts is very misleading. They are not reporting that the vast majority of stocks are in a bear market that is being masked by wild and speculative action in the T&N group.

For the value and equity-income investor this really is good news. If the average bear market has a duration of eighteen months to two years, then the worst is behind us, and the light at the end of the tunnel is getting brighter. One of the truisms of the bear is that he always corrects the excess in price-earning ratios. For many NYSE stocks, this has already taken place. High quality stocks, in growing industries are now selling at very reasonable multiples. So the worst may be over for quality, but it remains to be seen what will happen to those that are invested in the highflying T&N stocks.

Gordon B. Lamb
Jeffrey M. Campbell

December 13, 1999