Let's Call the Whole Thing Off By John Roque Special to TheStreet.com 7/6/01 1:38 PM ET

You like potato and I like potahto.
You like tomato and I like tomahto.
Potato, potahto, tomato, tomahto.
Let's call the whole thing off!

It's a good thing that those lyrics by Ira Gershwin don't apply to big-cap stocks because, right now, I'd be calling the whole thing off.

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Some say, "Bullish." I say, "Trading range at best."

Some say, "Valuations really aren't that bad." I say, "Trading range at best, and most look like they'll go lower."

Let's call the... ; well, you see what I mean.

Anyway, I've got this little question-and-answer deal about what's going on in the market. Hopefully it provides some insight. If not, I figure I can redeem myself with the trivia contest at the end of the column.

Question: Isn't it strange that large-cap stocks haven't performed better even though the Federal Reserve has lowered the fed funds rate by 275 basis points so far this year?

Answer: You bet it's strange, and that's what's so hard to figure out about the performance of large-cap stocks. Everyone knows what the Fed has done and is doing, and everyone knows the historical ramifications of an accommodative monetary policy. But still, large-cap stocks can't get out of their own way, and a lot of stocks still look as if they could work lower. To revisit a mantra I wrote about before, the idea of "buying stocks because the Fed is lowering rates" is going to be broken in 2001, like so many other post-1998 sell-side mantras.

Q: What do you think about cumulative breadth? I keep hearing that rising cumulative breadth is bullish. Though breadth has improved, I'm not making any money.

A: Cumulative breadth is an exposure indicator. It isn't a bullish or bearish indicator for the major indices. Improving cumulative breadth merely says that investors should cast their nets widely when searching for stocks. This is just the opposite of when cumulative breadth was declining from April 1998 to October 2000 and the major indices rallied from April 1998 to March 2000. By the way, I find it especially interesting that the cumulative-breadth bulls were some of the same people who were telling me that cumulative breadth didn't matter when the indices were rallying.

Q: Aren't Barry Bonds of the San Francisco Giants and Ichiro Suzuki of the Seattle Mariners having great seasons?

A: Bonds and Suzuki are definitely having great seasons. But how about Luis Gonzalez of the Arizona Diamondbacks, Brian Giles of the Pittsburgh Pirates, Paul LoDuca of the Los Angeles Dodgers and Lance Berkman of the Houston Astros?

Q: Can you review two large-cap stocks that you think are poster children for the big-cap disappointment you describe above?

A: No sweat. How about three? First, General Electric (GE:NYSE - news - commentary) is my bellwether, and I know some of the indecision in the stock is related to the Honeywell (HON:NYSE - news - commentary) deal. However, GE doesn't act well, and it looks as if it will retest 40. The stock is tracing out a multiyear top (it hasn't made you any money since late '99!) and is below its downward sloping 200-day moving average. Second, IBM (IBM:NYSE - news - commentary) has definitely performed well on a relative basis, but -- and this is a big but -- relative performance in a bear market (large-cap bear market) just means that your stock hasn't been hit yet. Investors have likely been hiding in IBM because of its relative action and because there is some talk about a "mainframe cycle." I have no idea about any potential mainframe cycle, but I do know that IBM is a bigger version of GE, and the stock has risk to 90. Third, look at Merrill Lynch (MER:NYSE - news - commentary), which I discussed June 14.

Q: What do you think of Microsoft (MSFT:Nasdaq - news - commentary)?

A: Microsoft's inability to convert the recent favorable Court of Appeals ruling into gains is a negative sign. To me, Microsoft's failure to rally after that good news is like the recent inability of the New York Mets to hit better with runners in scoring position. It's also discouraging because the stock had looked as if it was ready to work slightly higher (maybe to the high 70s).

Q: The home-building stocks act well. Aren't these things strong?

A: They are strong, but I'm a little cautious about chasing them here. Seriously, unless consumers have some untapped store of cash and unless the employment numbers get better fast, I can't imagine that the home-building stocks are going to make new highs.

Q: I know you've been cautious, but come on. Stocks are it. Where else are people going to put their money?

A: That's a bull-market argument. People have used the "where else are people going to put their money" story for years, but I don't think it works here. What's more important: losing money in stocks or preserving capital?

Q: So what does all of this mean?

A: It means that big-cap stocks will continue to disappoint. It means that if you've got gains in large-cap stocks, you should seriously think about reducing those positions. It means that you should check ESPN's schedule and try to see Gonzalez, Giles, LoDuca or Berkman play. It means that indicators (i.e., cumulative breadth) are merely entries on your investing balance sheet and not bullish or bearish themselves. It means that capital preservation is going to become a hot topic.

I'll send a copy of Baseball Dynasties: The Greatest Teams of All Time by Rob Neyer and Eddie Epstein to the first person who can answer the following trivia question: Who is the only major leaguer to hit for the cycle twice in the same season?

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