BF Anderson Private Portfolio Management

By Louis Navellier

Is the 2009 bull market over - after less than a year? Given today's severe reaction to news from across the pond, it may look that way to many investors. Investors' worries about the global economy and sovereign debt punished stocks today, causing the Dow to briefly dip below 10,000 for its worst day since last April. The Dow Average (INDU 10,002, -2.61%) ended down 268.37 points, its worst one-day point slide since April 20, 2009. While the news today deserves serious consideration, we don't believe that this is necessarily the beginning of a long term trend.

For the past couple of weeks many analysts have been saying that this bull market looks "long in the tooth" (see the Wall Street Journal's front-page Money section article on Monday: "Bull Looks Long in the Tooth: After 64% Run-up, Biggest Gains are Likely Past.").

I respectfully and cautiously disagree. It seems that many of the bearish analysts may be forgetting that this is a market of stocks - not just a stock market. The bare indexes can mask a major turning point in the rotation from "junk stocks" into higher-quality stocks.

For instance, last summer, I pointed out how AIG rose 245% in August alone, on massive volume. So did Fannie Mae (+233%) and Freddie Mac (+269%). They're still way above their 2009 lows, despite their technically bankrupt status - on federal life-support. Meanwhile, most top-quality stocks have languished. In fact, fourth-quarter earnings have largely been positive, but all the recent bad news is distracting attention from the fundamental story regarding earnings growth for most top-quality stocks.

Click on chart to expand or print

Click on chart to expand or print

A close look at the universe of stocks in the S&P 500 or Russell 2000 reveals in rather stark terms that the main source of the recent 10-month 70% rise in the major indexes has been in low-end, low-priced, low-quality "crap stocks" at the bottom of the food chain. As my staff's research shows (see attached charts), investors have poured money into these lower-priced (often single-digit) stocks, hoping for the big kill - and they did well last year - but now these inferior stocks are stagnating or falling - as they well should.

Click on chart to expand or print

Ned Davis Research shows, in the attached chart, that this kind of divergence is normal in the early stages of a bull market. Low-quality stocks "start fast but flame out." Then, higher-quality material takes off like a second-stage rocket, rising in a strong and steady arc. While many market analysts fret over the fading fortunes of yesterday's favorites, they're missing the opportunity to rotate into these high-quality stocks.

Since investors seem to be in a "show-me" state now, the attached charts would be a first step in showing them the potential growth for high-quality stocks in the second-stage of the current (quite young) bull market. For investors worried about getting into stocks "late in the bull cycle" when "all the biggest gains are behind us," perhaps these charts will help, as part of a portfolio check-up with their financial advisor.