At a glance, the U.S. stock market appears to have muscled through the often-treacherous
month of October.
Yet last month's gains -- 1.5 percent for the Standard & Poor's 500 and 5.8 percent for Nasdaq -- belie a trend of withering leadership, where a handful of technology shares are doing the heavy lifting while the rest of the market stalls or fades.
Equity analysts worry that a rally underpinned by a declining number of stocks tends to be more fickle and prone to messier pull-backs.
Indeed, come Nov. 1, U.S. stocks found themselves on the retreat, with four stocks falling for every one rising. By midday on Thursday, the S&P was down about 1.4 percent.
"It reminds me of the late '98-'99 period," said Joseph Battipaglia, market strategist at Stifel Nicolaus. "We were calling it a bull market because the gainers were big-cap names and they they helped move the indexes, but it was not sustainable."
Most Below Average
One warning sign, Battipaglia noted, is that half of the components in the S&P 500 are trading below their 200-day moving average, a negative technical indicator for those shares.
Another sign of trouble is the steady falloff in the number of stocks rising on a daily basis.
On a 20-day moving average, October began with New York Stock Exchange advancing issues outnumbering decliners on a 6-to-5 basis, but ended the month essentially even. By the same
measure, the Nasdaq started the month with roughly an even number of advancers and decliners each day but ended it with decliners outnumbering advancers by 15 to 14.
Despite the growing ranks of decliners, sharp gains for stocks such as search engine Google and Research in Motion, Apple and Microsoft have kept indexes above water.
Each of these stocks rose more than 20 percent in October and combined they added $154 billion in market cap in the month. By contrast, the entire S&P 500 rose $185 billion in
value during October.
Meanwhile, investors shunned financial stocks, which make up about 20 percent of the S&P 500, after several major names, including Merrill Lynch and Wachovia, reported big write-downs related to the mortgage market crisis. The S&P financials sector fell 2 percent last month, the worst-performing segment of the index.
"Clearly the money is moving out of financials, whose earnings are decelerating, and going into those that have earns that are accelerating," said Paul Mendelsohn, chief investment
strategist at Windham Financial Services in Charlotte, Vermont.
"But money is moving into a very finite part of the the tech area," Mendelsohn added. "If you just go out and buy technology stocks, you're not making money here."
Semiconductors stocks, for example, which comprise a hefty chunk of the tech sector, suffered last month. The Philadelphia Stock Exchange index semiconductor index shed more than 7 percent after a weak outlook from Texas Instruments, a bellwether for the group.
Big Names Beat Estimates
Google, Microsoft, Apple and Research in Motion all reported earnings that blew away Wall Street estimates and made upbeat comments about the quarter ahead. Still their stocks'
swift gains aren't just a function of earnings, according to traders.
"Guys are not out there buying them to hedge their portfolios, they're trading mechanisms now," said Joseph Saluzzi, co-manager. "It's the momentum trade if you want to get long. They'll throw them out tomorrow if the momentum goes south, but as long as the trade works, they'll keep doing it. They've racked up enough gains that they can take on the risk."
In addition to the fast money traders, more conservative portfolio managers may also be getting swept up in the feeding frenzy surrounding big-cap tech.
"It's really important when you see a significant shift in market breadth to look at the calendar. Oct. 31st is the end of the year for many mutual funds," said Peter Kenny, managing
director at Knight Equity Markets in Jersey City, New Jersey.
Portfolio managers "window-dress" their portfolios for their annual statement by loading up on the latest winners and dumping stocks that have been the subject of bad news.
Since the subprime crisis spread to affect so many companies, this quarter's round of window dressing may have been more pronounced than others.
Once the fourth-quarter gets underway, Kenny said he will look for sectors besides technology to take part in the market's daily gains. Ideally, he said, beleaguered financial stocks would join in the rally.
"Historically speaking, in order for rallies to have any real sustainability, you need participation from that sector because they provide the infrastructure for raising capital."