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Don't Believe the Hype

All the 'Dow 11,000' excitement fails to recognize the ongoing woeful performance of big-caps vs. small.

Editor's Note: The following is an exclusive reprint of market commentary originally posted at the Schaeffer's Research Web site on Jan. 10.

It could be viewed as something of an indicator of how poor a performer U.S. large-cap equities have been ... If it were the first time the Dow had crossed 11000, it would be even more important. ... We shouldn't get too excited.


Ben Pace, chief investment officer at Deutsche Bank Private Wealth Management -- The Wall Street Journal, Jan. 10.


Yes, indeed, Mr. Pace.

In fact, the

Dow Jones Industrial Average

straddled the 11,000 mark no fewer than 32 times on the weekly chart from May 1999 through June 2001, and over 100 times on the daily chart over this same period.

On the other hand, the Russell 2000 Index (RUT -- 703.61) closed above the 700 mark for the first time in history this week. But I somehow failed to notice a "700 watch" for the Russell on financial television.

But perhaps of greatest interest is the chart below of the miserable performance of the Dow vs. the Russell since the 2002 market bottom.

And so far in this new year? As of Wednesday's close, the Dow was up 3% in 2006 and the Russell 5.6%.

Falling Giants
Hype over Dow 11,000 overlooks the index's lackluster performance

Source: Schaeffer's Investment Research

It should be no shock to you that I'll take this opportunity to reiterate my bullish posture on the small-cap space as exemplified by the Russell and my negative posture on the blue chips as exemplified by the Dow. The small-caps are underhyped while delivering strong performance; the blue chips are overhyped while delivering mediocre performance.

But let me add a few choice words about some of the Dow components.

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Disney : Has managed the very difficult feat of underperforming Time Warner shares over the past decade.

IBM , Intel , Microsoft : The big three of "yesterday's news in tech."

J.P. Morgan Chase : The "no place to hide" stock if over-the-counter derivatives blow up.

Coca-Cola : Dead money for a decade and recently overtaken in market cap by Pepsico .

Merck and Pfizer : The worst of Big Pharma, and that's saying a lot.

Wal-Mart : Best candidate for "always the worst-performing retailing stock."

Finally, General Motors : I've made bullish noises about this stock for almost a year -- "long and wrong," as they say.

GM has been the best-performing stock in the Dow in 2006, which is all the more interesting, given that

Business Week

asked the question in late December: "Should the Dow Ditch General Motors?" I remain long the shares, as I see huge recovery potential should the bankruptcy talk continue to recede. We'll see.

At the time of publication, Schaeffer's Investment Research was long GM and the iShares Russell 2000 Index Fund, and short IBM, Microsoft, Intel, Merck, Pfizer, and Wal-Mart, although holdings can change at any time.

Bernie Schaeffer is Chairman and CEO of Schaeffer's Investment Research, Inc. and author of The Option Advisor: Wealth-Building Techniques Using Equity and Index Options. Bernie has edited the Option Advisor newsletter since its inception in 1981.

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