The S&P 500 has been stuck, but look inside and there's been plenty of action
August 22, 2003: 8:22 AM EDT
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) - Look at it the way most Wall Streeters do, and the market hasn't done a thing since June.
The S&P 500, which tracks 500 of the nation's biggest companies, has been stuck in an incredibly narrow range, never straying above 1,011, rarely tarrying below 965. This has left a lot of portfolio managers sitting on their hands -- they're convinced that when the market breaks out of the channel it's been stuck in, there's going to be a big move. But they're not sure which direction that break is going to be in.
Meantime, there are legions of traders who jump in and short the market whenever it gets near the top of the range and go long when it scuds down to the bottom -- a fine way to make money so far, although there could be plenty of pain when the market finally makes its move. Whenever that is.
Within the guts of the market, however, it's been a different story. Cyclically oriented sectors -- tech, consumer cyclicals, industrials and, especially, basic materials -- have all done well this quarter.
The S&P's smaller stocks, too, have been doing better than the big guns. The index is weighted by market capitalization, so Microsoft, a $280 billion stock that hasn't gone much of anywhere lately, has over 90 times as much pull as a $3 billion stock like Navistar. If we were to rank all the stocks in the S&P equally, the index would have broken above its trading range a week ago. It would also be up 23 percent this year, rather than 14 percent.
So, the S&P is treading water, but within it investors are shifting toward cyclical stocks and smaller stocks. What's it mean?
Two things. First off, cyclical stocks and smaller stocks tend to benefit when the economy improves. Given the way economists have been busily penciling in much higher growth for the third quarter than they originally expected (second quarter GDP looks to be revised upward as well), investors are seeing an increasingly brighter future, and they're looking to take advantage of it.
Second, investors appear to be betting that when the market breaks out of its range, the direction is going to be up. These cyclical stocks and smaller stocks also tend to be more volatile stocks (high beta is the geeky trader term) -- when the market as a whole goes up, they see outsized benefits, when the market goes down, they get hammered.
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