WHY NASDAQ MAY PROVIDE GOOD VALUE -- LARGE CAP LEADERSHIP MAY HAVE STAYING POWER -- GE BREAKS OUT -- AMGEN LEADS BIOTECHS AND QQQQ HIGHER

NASDAQ IS UNDERVALUED RELATIVE TO THE BIG BOARD ... Earlier in the week I wrote a piece on the relationship between the Nasdaq and the S&P 500. One of our readers suggested using the NYSE Composite Index in place of the S&P because of its smaller reliance on large tech stocks. So I did. And it does give a slightly different view of things. Which brings me to today's article which is about why the Nasdaq market looks undervalued relative to the NYSE market. Chart 1 is a ratio of the Nasdaq Composite Index divided by the NYSE Composite Index. The chart shows Nasdaq outperformance from late 1998 to 2000 and again from late 2002 to early 2004. In between those two periods of Nasdaq leadership, the ratio plunged from 2000 to 2002 when the Nasdaq crashed 80%. What intrigues me here is the possible double bottom on the ratio chart. In other words, the Nasdaq/NYSE ratio line is starting to bounce off the previous ratio low formed in late 2002 (two up arrows). The ratio line has been rising since August and reflects renewed interest in the technology-dominated Nasdaq market. While all eyes are currently focused on the new highs by the Dow and the S&P 500, don't forget the Nasdaq market which may provide even better value.

Chart 1

LARGE CAP LEADERSHIP MAY HAVE STAYING POWER ... A lot has been written about the new investor preference for large cap stocks in the recent rally. Although that's sometimes consistent with a more defensive market, the next chart suggests that large cap leadership may not be a short-term thing. Chart 2 is a ratio of the Dow Industrials divided by the Russell 2000 Small Cap Index. The rising ratio from 1994 to 1999 shows large cap dominance. From 1999 to this year, however, large caps have played second fiddle to small cap stocks. [The six years of small cap dominance since 1999 also matches the six years of large cap dominance during the 1990s]. From a chart standpoint, the large cap/small cap ratio has reached the lows formed in 1993 which is a potential long-term support area. Although the upturn so far has been relatively modest, time and price considerations suggest that this is a logical spot for large caps to assume new leadership over small caps. That's consistent with Chart 1 which shows new Nasdaq leadership. That's because the Nasdaq market is usually driven by its 100 largest stocks.

Chart 2

GE STARTS ACTING LIKE A GENERAL ... Another sign that investors are turning to large cap stocks is the recent breakout by General Electric. The weekly bars in Chart 3 show the stock breaking through its spring 2005 peak just below 36 to reach a new five-year high. Its relative strength ratio (solid line) has also started to rise for the first time in eighteen months. That means that GE is rising faster than the S&P 500. Since it's the biggest weighted stock in that index (and the Dow), its upside breakout is giving a boost to both large-cap indexes. Chart 4 puts the stock's relative strength line in better perspective. The GE/S&P ratio rose from 1997 to 2000 (during the last period of large cap dominance). After peaking in 2001, the ratio has trended sideways from the end of 2002 (when the market bottomed) until now. Not only is the ratio starting to rise, but it's doing so from chart support along the lows of the last four years. That provides a good combination of short-term upside momentum and long-term value. It's also another sign that formerly neglected large-cap stocks are coming back into favor. The new mantra when picking stocks is to think big.

Chart 3

Chart 4

AMGEN CONTINUES ITS CLIMB ... Speaking of large cap stocks on the rise, I can't resist showing Amgen again. I showed it yesterday leading a new resurgence in biotech stocks. It's the biggest stock in the biotech group and the group's bellwether. The stock surged another 2.4% today with another day of strong volume. Its relative strength line is starting to rise as well. Amgen happens to be one of the biggest stocks in the Nasdaq 100 Index and is helping lead that index higher as well. Chart 6 shows a strong similarity between the two charts. By the way, the rising ratio line in Chart 6 compares the Nasdaq 100 Shares (which are the largest 100 stocks in the Nasdaq) divided by the Nasdaq Composite Index. The rising RS line since mid-July confirms that the Nasdaq market is being led higher by its largest stocks. That's what this market message is all about.

Chart 5

Chart 6