Business News & TipsAlan S. Moore / L’Observateur / February 24, 1999Equity performance for the last four months has been almost exclusively a reflection of an investor’s exposure to large technology stocks. Thenarrowness of the performance window is generally not a healthy sign for the market. Indeed, such a narrow focus in a bull market is usually aprecursor of a price correction; momentum wanes in the hot sectors as speculative forces exhaust themselves and valuations become excessive.
Published 12:00 am Wednesday, February 24, 1999
The ensuing volatility in stocks is normally accompanied by a rotation or broadening of investor interest to attractive sectors that have been lagging. With the caveat that the market rarely fits exactly with what hashappened in the past, it appears to us that the recent price volatility is a start of such a rotation.
A scenario that we have been expecting for some time is for stocks to enter a prolonged trading range that would be characterized by rapid rotation among sectors. This range would be bound on the upside from thecombination of a moderation in the forces that have propelled stocks these last four years and high stock valuations. Downside levels will becontained by a continuation of the positive investment environment and strong investor loyalty to equities. If we have indeed entered thisscenario, performance will come from owning quality, out-of-favor stocks at reasonable prices and waiting for the rotation to occur, which is far different than the momentum-led market that has occurred since last October.
(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, Inc., a diversified securities brokerage and financialservices firm that is a member of the New York Stock Exchange, Inc. AndSIPC.)
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