1999: A bear in bull's clothing?

Reprinted with permission from World Finance Net IPO Newsletter, written by Alexander Frauenfeld

The year 1999 has been ended as a dream for the US equity markets and investors all around, right? Not so fast.

By the numbers, it was a solid year. According to data published on CNBC today, the Dow Jones Industrial Average is up 22% and the S&P is up 16.8% for the year. Even more impressive was the technology heavy NASDAQ, which has gained a staggering 80% year-to-date. This is the best performance in the history of the index, outpacing all previous records.

All year long, and especially in the late second half of 1999, soaring markets have begged the question whether this trend will continue. It is the end of the year now, and all of the major indices are at or close to all time highs. Trading volume at its strongest ever. Additionally, the next FOMC meeting is almost 2 months away and Y2K seems less of a problem than previously anticipated.

All of this supports the very bullish sentiment in the market. But look beneath the exterior and things are not so good. Since the markets commenced their run up earlier this year, market breadth, the number of decliners in comparison to advancers, had been negative. This observation has held true even on days when the NASDAQ or another of the major indices has had record percentage or point gains. What this suggests is that only very few stocks are actually pushing the markets to the mind-boggling levels.

If we look deeper into the numbers, that becomes very clear. Despite the fact that the DOW is up over 20% and the NASDAQ is up over 80% year-to-date, the average portfolio is up only 19% year-to-date, outperforming the S&P by an ever so slight margin. In addition to showing that the S&P 500 is probably the most representative index of the widely tracked indices in the US, the numbers also show that the average investor did not fare as well as one would anticipate.

Here are some of the numbers. The DOW is up 22% on the year, but 62% of the NYSEs stocks are so far unchanged or are even down in 1999. Only 26% are in the 0% - 50% gains range. Only 12% of the listed stocks have gained more than 50% year-to-date. That's good for those particular stocks, but not indicative of a broad rally.

On the NADSAQ, the contrasts become even more obvious. The index is up better than 80% as of today but at the same time 53% of the nearly 5,000 stocks in the Composite Index are actually unchanged or even down for the year. About 20% of the stocks are in the 0% - 50% range and only 27% are actually close to gaining what the index has done this year.

The number of stocks outperforming the market can almost be counted on one hand, but it is these that continue to push the markets higher. The overall rally is led almost entirely by the technology sector, which is obvious when one looks at NASDAQ's gains. Technology sector mutual funds are up approximately 113% year-to-date. It is therefore a very narrowly-based rally and is extremely unstable. That is why we have seen so much volatility in the markets of late, because the slightest move of one of these leaders will have a major impact on the markets performances on the day.

So, 1999 was a great year, but only for a selected group of stocks. That is something to consider for investors who are dangerously high on tech, and something those who are not already know.

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