April 24 - Shake, Rattle And Roll Away From Tech
Is everything a bargain if the price rises?

There was a whisper circulating around Wall Street late last week, which was "buy blue chips stocks because they have bottomed  and tech stocks are too high".  Well, it wasn't exactly a whisper, it was more like a loud bellow from every talk show head and analyst in America, but the question remains; Are the markets using momentum and rotation as a psychological band aid to try and fix the bleeding bull?

First of all blue chips stocks are not cheap, one could argue that they are down right expensive.  The average P/E using high end earnings estimates for year end 2001 on the Dow 30 is 19.74. For those unfamiliar with this ratio, this means that when 2001 ends, some 85 weeks from today, the current P/E on the Dow will only then be 20.  The  current P/E of the Dow in October of 1987 was not much higher, needless to say, not much higher than if the Dow stands still and each component can hit high end earnings targets for the next 7 quarters.  But when  the old blue chips rally your bound to hear the word "bargain" in thick of the investor conversations.

The NYSE on the whole doesn't appear to be a bargain so much as a momentum machine. In 1987 the turnover rate  on the exchange was 78% (meaning 78% of the total amount of shares available to be traded changed hands that year), this was the highest reading since 1929.  Am I seeing Deja Vu?  Last year the NYSE had a 78%  turnover rate again (highest since 87), and at the end of the first 3 months in 2000 that rate has climbed to 101% annualized.  To put this in perspective, during all the ups and downs from 1950 to the beginning of  1980 the NYSE never once surpassed a 30% turnover rate.  But when market breadth turns positive for a couple sessions the word "bargain" begins to circulate and momentum continues.

The perceived bargains in the Dow 30, discounting Philip Morris and maybe a couple others, are momentum based stocks trading an historically high percentage of their floats.  If you buy when they are depressed they should rise if the next flurry from rotation comes about.  But try not to confuse momentum with bargains.  Blue chips can report great earnings one day and slump 5% the next, then rally 10% for no substantial reason when rotation out of tech stocks take hold.  Does this mean bargains occur right before money flows increase or when a company does something which is worthy of attention?
Dow stocks are purchased primarily for short term capital gains and the average dividend yield remains below 2% (1.743% by my calculations).  Although this beats the S&P 500's average of 1.17% it is a far  cry from June 1932 when the 30 best companies in America had an average dividend yield of 15.32% (ah yes, the roaring dividend yields of the picturesque 1930's).  But I almost forgot, this is a big bad bull market  and dividends are not important. Capital gains for everyone!... Its gonna take at least 85 more weeks of before I'm convinced.