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Re: "Hugh Whinfrey" <whinfrey@xxxxxxxx> - response by bruce@xxxxxx:
Don't be too hard on him Bruce, it's just his reasoned response, and he gets
to have an opinion just like you.
I agree with the analysis you gave about the Dow shedding losers and this
contributing to the disparity relative to the Russell 2000, but think
there's more to it than that. And just because it's written up in the WSJ
doesn't make the interpretation gospel either, or even technically accurate.
It's open to interpretation as to what it means.
At 01:00 PM 8/8/98 -0400, you wrote:
The important thing is that
>the disparity (whether its growing or shrinking) SAYS NOTHING ABOUT THE
>OVERALL HEALTH OF THE STOCK MARKET (I hope it sunk in this time).
Actually it is the trend in the relationship between the two that tells us a
lot about where we are in the business cycle and therefore the stock market
cycle. Historically as a bull market heats up, the Russell 2000 type issues
gain on the blue chips in the Dow, as investors seek better growth of
earnings from lower cap higher growth issues, and the spread between them
narrows.
As the bull market matures and the spreading fear of declining earnings
takes hold, historically the spread widens. That tells us something about
the stage of the bull market and that tells us something about the health of
the market. The market is also possibly telling us that there is a move
afoot to safety and quality and that some speculative excesses are now being
squeezed out of the smaller cap stocks in general as the expectations grow
that their earnings growth momentum is weakening relative to the Dow stocks.
The flip side of the argument that the WSJ makes is that the Dow is
relatively and absolutely 'OVERSTATED' relative to historic values because
of the new periodic additions to the Dow Jones Industrial Index. If you
look at a chart that is reconstructed without the recent new additions, the
Dow Jones Industrial Index is MUCH LOWER in absolute terms than it is today
as presently constructed, PERIOD. AND relative to the Russell, and the
disparity relatively smaller.
Therefore the index construction technique does add a strong inflated price
'bias' to the Dow Jones Industrial Index.
When the market is viewed from this perspective one can also glean the
OPPOSITE conclusion to that which you refer to in support of your opinion. I
think that is the mesaage contained in Hugh's response to your original post.
which says:
>The Dow drops its losers and replaces them with winners, it thus is prone
to 'inflation' in its own right,
And one more thing. Don't expect anybody here to pick up on your figurative
terms and replace them with more obscure references like the Russel Top 200.
You wrote: "Hugh, apparently the fact that I was using "Dow stocks" purely as a
figurative term for large cap stocks went right over your head."
When you say "Dow stocks" in your post, people here will naturally think you
meant 'Dow stocks'.
It's not reasonable to basically insult someone in public for not gleaning
an intended 'figurative term' in your post, OR agreeing with an article
published in the WSJ.
IMHO
Michael Paauwe
mpaauwe@xxxxxxxxxx
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