Are We Concentrating on the Wrong Thing?

Sometimes I find myself concentrating on some part of a puzzle and totally missing something that is very, very important.  I sort of feel that way this morning as I do my broad review of the markets.  I have to admit, I've been concentrating on the "market" as described by those major indices, but something is happening under the surface that I've been giving very little attention.

Admittedly, I've been paying more attention to the S&P 500, the NASDAQ Composite, or even the S&P Mid Cap index, but under the surface, you can see an interesting trend.  The S&P mid-caps, the Russell 2000 (smaller cap growth companies), and the S&P small-caps really soared until mid-February of this year, but then went into a big stall until the middle of April.  On April 18th, the small caps had gone from the market leader to the extreme category of being the worst laggard.  That is when it all changed.  In the following month, and still today as they've just made a new high, the small-caps have left the large-caps in the dust.  So...this makes tremendous sense.  Which companies have the most international exposure?  Which companies are more dependent on domestic growth here in the US? 

If you look at the internal nature of the NASDAQ, which has a larger number of smaller companies and growth companies, you can see this different picture as well.  In the chart above of the NASDAQ Advance/Decline Line, you can see a definite reversal of trend that occurred late last year.  This is definitely good news, but the FANTASTIC news (which I shyly admit I've been overlooking) comes from the persistence of the uptrend in the NASDAQ's Advance/Decline Line.  You can see the downward slope of this line (which meant it was hard to be a growth investor) the lasted until October/November of last year, but that has changed.  The correction that ended in April of this year threatened this pattern, but now it is completely realigned - higher highs and higher lows.  I think this is MUCH MORE SIGNIFICANT that most of us have been recognizing.

Of course, we can also say that the public investor tends to start buying growth stocks in good times.  So just maybe the new "falling out" with low yielding bonds has had something to do with this turn of events.

Don Hays

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