When the Generals Move Out…

…but the infantry doesn’t follow.


The classic major market top is made when the big names lead and the rest of the pack sort of stands around watching. Or in words of the old Wall Street axiom, “the Generals move out but the infantry doesn’t follow”.

Some signs are beginning to emerge that the hoopla surrounding Dow 13k may be evolving into a predominantly big name event. The data shows that on a very short-term basis (less than 2 weeks) and on a one-year basis large and mega cap issues have taken the lead and pushed the Smids into the second and third place performance rung (see chart). This has implications on several levels.

First, the underperformance by the Smids on a one-year basis has gone largely unnoticed by most (except those who read this blog, of course). Yet, it does suggest that last spring’s decline combined with the late winter decline of this year has shifted the focus from the Smids to the large and mega cap group, which can be interpreted one of two ways: either it is the start of new major bull cycle in which large cap leadership shows the way or it is the beginning of the end as large cap leadership is not supported by the rest of the market.

Second, and perhaps more importantly, the hot money hedge fund crowd may be forced out of their comfort zone in the Smids and into the big boys domain as they seek to minimize the underperformance damage a large and mega cap over Smids performance implies. This has many implications, not the least of which is the potential for an overheating of the big cap sector and a further gap between the big names (the generals) and the second and third tier (the infantry). And in the process, such a move would ring the technical analysis bells of many technicians.

Investment Strategy Implications

I am deeply suspicious of multi-year bull markets that rise under the guise of climbing a wall of worry and, in the process, produce a shift of leadership from the broad market to the big boys. I guess one would have to call me a mid cycle skeptic, which is the foundation for this bull rally. Accordingly, the very near term and one year data showing a shift in leadership to the generals must be supported by the troops. Any deterioration resulting in divergences is unsustainable and threatens to produce a major market top. We are not there yet, but it does bears watching.

Note: Despite all the cautionary implications you are reading on this blog (see all postings), the undeniable fact remains: no major market top has been made. And until such time, the current lean against the wind/regression to the mean investment strategy espoused here is most appropriate.