Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Nasdaq: The Case for Outperformance
07/11/2003 12:00 am EST
Individual investors and institutions alike often seek comfort in the ‘blue chips’ and there is a long-standing belief among investors that large-cap stocks offer more safety than their smaller brethren. Despite the apparent security of large-caps, several top advisors are suggesting that small and mid caps are now the place to be.
John Murphy, chief technical analyst of stockcharts.com,
notes, "The Nasdaq recently touched another 52-week high and continues to lead the market
higher. We like the fact that the market advance is being led by the Nasdaq and
the Russell 2000. That's because technology leadership is a good thing.
Small-cap leadership is good as well. Historically, small-cap stocks show upside leadership during
the first year of a stock market bottom--and the end of a
"We are encouraging investors to maintain a hefty weighting in small-growth companies, but to be prepared for some bumps along the way," says Jim W. Oberweis, editor of The Oberweis Report. "High-growth small-cap companies have risen a great deal very quickly. In the last three months, our portfolio is up about 27%. That’s a remarkable jump for any three-month period and it gives us some reason to think that a market pause would not be unreasonable. It gives us the opportunity to remember that this has been an unusually favorable rebound. But please do not misunderstand us. The best strategy is still to focus on innovative companies trading at reasonable valuations. We remain very optimistic that small-cap growth stocks will outperform the broader market over the next several years. The cyclical dominance of small companies vs. large tends to last several years, not just a quarter or two."
Bernie Schaeffer advises investors, "Keep a healthy cash reserve and avoid the so-called ‘safe’ blue chips." He prefers the Nasdaq over the large-cap indices. He explains, "From a technical and sentiment standpoint, there are three major reasons to believe Nasdaq outperformance will continue or perhaps accelerate in the second half. First, from a long-term perspective, the rally by Nasdaq vs. the DJIA has thus far been minor. If the Nasdaq were to correct 50% of the decline from its peak relative strength in early-2000 to its trough in 2002, that would represent an additional 67% in positive relative performance. Second, the Nasdaq can rally by an additional 32% before bumping up against its 80-month moving average. Third, despite the Nasdaq's powerful performance since October 2002, sentiment is very skeptical. I consider bearish sentiment in the context of strong price action to be the most powerful indication that the strength will persist. Nasdaq 2000 is by no means out of the realm of possibility before this move is complete."
Dan Wiener, editor of The Independent Advisor for Vanguard Funds, makes an intriguing case for smaller stocks. He says, "The big Wall Street firms have cut back on their analytical staffs. By my way of thinking, that’s good news for mid-cap stocks. For example, Smith Barney, the research arm of giant Citigroup, recently announced it was dropping its coverage of more than 110 companies. Currently they say they cover about 70% of the companies in the S&P 500 index, or about 350 companies. If Citigroup is ignoring almost one-third of the companies in one of the best known indexes in the investment world, imagine the companies they aren’t covering in the mid-cap and small-cap arenas. All of this provides even more ammunition for my belief that smart managers with their own well-honed investment research staffs will be the winners in the coming months and years as they pick through the vast sea of unknown and misunderstood public companies. The mid-cap universe is the best place to look for index-beating value."
"The Nasdaq has continued to perform better than the rest of the market," notes Dennis Slothower in OnTheMoney.com . "When you see this kind of market behavior it means institutions are unloading their large-cap stocks, which are more liquid and therefore more defensive in nature. The big institutions have held big positions in large-cap stocks over the bear market and are rebalancing their portfolios by buying smaller cap growth stocks. Market leadership is healthy, with small caps leading the way higher. Micro-cap mutual funds are in well-established uptrends with many breaking to new highs. This is a key window as to how investors are feeling about risk. The bottom line is the market is telling us the trend is your friend. Remain fully invested."
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