SAN FRANCISCO -- The Nasdaq Composite tried to steal the headlines today, even as blue-chip stocks posted better relative performance. The Dow Jones Industrial Average rose 1.1% today but failed to sustain an intraday move beyond the psychologically significant 10,000 level, closing at 9998.39, while the Nasdaq eclipsed the 2000 barrier on a day when it rose 0.9%. The S&P 500 rose 0.8%. The combination of positive earnings guidance from General Electric ( GE) and Pfizer ( PFE - Get Report), as well as robust housing-starts data -- home construction unexpectedly surged 8.2% in November -- got equity investors excited again about the economy's recovery prospects. That, in turn, gave a boost to cyclical stocks such as Caterpillar ( CAT - Get Report) and 3M ( MMM). The Morgan Stanley Cyclical Index rose 1.9%. Less logical than the stock market action was the bond market's advance, although maybe fixed-income investors focused on the latest round of layoffs announcements vs. the housing data. The price of the benchmark 10-year Treasury rose 15/32, to 99 2/32, its yield falling to 5.12%.
the market will wash out for a few weeks and generate fear," Hochberg said, indicating such a development will then "bring on another upturn." In conjunction with the Elliott Wave principle, which catalogs long-term price patterns and seeks to use them to predict market trends, the newsletter also employs sentiment indicators, which show rising complacency among investors. The three-week average of bullishness in the American Association of Individual Investors' sentiment index has recently risen to more than 62%, levels not seen since January 2000, Hochberg said. The Chicago Board Options Exchange Volatility Index, which fell 5% to 24.16 today, suggests little fear. Finally, he noted that the sell-side indicator published by Merrill Lynch strategist Rich Bernstein shows "overwhelming bullishness" among Wall Street strategists. "Nothing in our work shows a buy signal anytime soon," Hochberg said. "You need to have a downdraft to get that." That said, the Dow Jones Utility Average, which rose 1.6% today, is "setting up for a good countertrend rally" after getting "crushed" by the Enron ( ENE) bankruptcy, Hochberg said. the S&P 600 still has very compelling valuations" relative to the S&P 500 in terms of price-to-sales, price-to-earnings and price-to-book value, Ellis said. I don't have data for the other metrics, but the S&P 600 is currently trading at a price-to-earnings ratio of under 19 times estimated 2002 earnings of $12.07, based on Thomson/First Call's consensus. The S&P 500, by comparison, is trading with a P/E of 23.2, based on estimates of $49.14 for next year. Earnings for both the S&P 500 and S&P 600 are expected to grow by about 12.7% next year, meaning small-caps offer about an 18% P/E discount to large-caps for the same earnings growth next year. (Those calculations assume estimates for both the fourth quarter and next year prove accurate, a dubious assumption, I know.) Beyond valuation comparisons, Ellis noted that small-caps have led big-caps in the tail end of every recession since the 1920s and in the first six months of recovery as "the market starts getting more comfortable with a higher risk environment." Another sign of investors' appetite for risk, the spread between corporate bonds and Treasuries, has only recently begun to narrow, she noted. "I can say with a lot of conviction that small-caps are going to be better than large-caps coming out of recession." The fund manager further argued that despite a recent pickup in IPO activity, the supply of small-caps remains low relative to demand. She also mentioned that small-caps have come out of a multiyear cycle of underperformance. In conjunction with lower interest rates, Ellis believes those factors "might drive small-cap performance even longer than 18 months coming out the recession." The fund manager reiterated faith in hospital management companies, including Community Health Systems ( CYS). J.P. Morgan Fleming also has a significant stake in small-cap semiconductors, including Cabot Microelectronics ( CCMP), Microsemi ( MSCC) and Brooks Automation ( BRKS). Which brings us to Ellis' final rationale for a bullish outlook on small-caps: Because many small-cap tech stocks have had their earnings growth "blistered" in the past 18 months, "even marginal improvement" as a result in an upturn of the tech cycle will result in "huge leverage" for the group, she said.