Defensive Big Cap Rotation

NOTE:  This Market Commentary alert was originally emailed to subscribers at Ritholtz Research & Analytics on Mon 12/18/2006 4:24 PM;

This is posted here not as investing advice, but
rather as an example of a trading call for potential subscribers. We
expect to post future advisories in a similar manner — after the call,
but in the correct chronological location on the blog.

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With the Russell 2000 down almost 1.5% today, and the Nasdaq reversing its earlier gains (its down over 1% as I type this), we wanted to revisit our previous Bloomberg radio comments that after 5 long years, the Big Caps were ready to start outperforming.

That seems to be happening with several names now; We uploaded an analysis on General Electric (GE: Technical Buy), but other large names — notably Citibank (C) — have also been trading higher , and on big volume.

This is happening just as the small cap and speculative high flyers are faltering. The rotation away from speculative names — Nasdaq underperformed last week, while the small cap Russell 2000 is today’s biggest loser — is very possibly a defensive rotation. The big Multi-Nationals also benefit from the weak dollar – it makes their products cheaper to overseas buyers.

We have previously discussed that the Transports have begun rolling over, and the market breadth remains weak. These are a few more pieces in the market topping puzzle. The VIX made multi yuear lows last week, signalling plenty of complacency . However, beware: there is still plenty of liquidity-driven momentum — all the mergers and private takeouts are proof of that. With the major trend not broken, it remains premature to aggressively short stocks.

We also want to point out that, after nearly 4 years, most of Wall Street has now turned rabidly Bullish. My Street.com colleague James Altucher called for Dow 16,000 next year; Don Hays last week announced his 27% forecast for the SPX in 2007; Cody Willlard ‘s "Get Real" column essentially says ignore everything else, the only thing that matters is the rally. These ar enot the sorts of things you hear at the beginnings of bull markets . . .

Meanwhile, some Wall Street’s biggest bears are throwing in the towel. A Bloomberg article today noted that:  Stock Strategists Raise Alarms With Call for Rally.

"The last time Wall Street unanimously predicted an advance for the S&P 500, in 2001, preceded a 33 percent slump over the next two years . . .

The lack of dissent among strategists has caught the attention of some investors. Since the current bull market began in October 2002, at least two strategists every year have estimated declines for the S&P 500 in their annual forecasts."

Rampant Bullishness of this sort is not heard at bottoms; Rather, they are symptoms of a late stage bull market. Indeed, the time to get aggressively bullish is not 4 years into a Bull market, but rather 4 years ago.

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For those who want or need to be invested at all time, GE presents a solid defensive name and a good risk reward ratio.

-Barry Ritholtz
December 18, 2006

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