Nasdaq Looks Healthy, ‘Til You Check Its Pulse

In another milestone for the bull market, the main share index of the Nasdaq Stock Market hit a new high Wednesday--its first record close since April.

But many investors in individual Nasdaq-listed stocks may not feel they have much to celebrate. Because while the Nasdaq index says that market is making a strong advance this year, the experience of individual stocks is quite different. Many remain stuck in the mud, even in the face of Wall Street’s latest rebound.

The Nasdaq index itself, while including all of the 5,000-plus stocks that trade in that electronic marketplace, is dominated by its biggest names. Those stocks, including Intel, up $3.19 to $78.31 on Wednesday, and Dell Computer, up $5.38 to $96.38, were largely responsible for pushing the index up 1.4% to a record 1,935.39, topping the previous record of 1,917.61 set April 22.

But in the Nasdaq market overall, nearly as many stocks fell as rose Wednesday--losers totaled 2,002 while winners totaled 2,141. Another 1,440 were unchanged.

The disparity in performance between Nasdaq’s big and small stocks--the latter making up the vast majority of Nasdaq issues--has been mirrored in the stock market as a whole this year, as many owners of small-stock mutual funds know all too well.

The Standard & Poor’s 500 index, the broadest blue-chip stock index, has surged 20.2% this year to a record high as of Wednesday.

But another S&P; index that tracks 600 smaller stocks is up just 6.9% year-to-date and remains about 6% below its April 22 high.

Thus, the Nasdaq market “looks like it’s suffering some kind of disease,” despite the composite index’s 23.2% surge this year, said Richard Eakle, who heads investment research firm Eakle Associates in Fair Haven, N.J.

*

The reasons for the performance gulf between big stocks and small stocks have been much discussed on Wall Street in recent months. Many analysts believe the major reason investors are reluctant to bid for smaller stocks is a fear that in a highflying market overall, anything could go wrong at any moment. And when disaster strikes, it is much harder to unload smaller, thinly traded stocks than big, blue-chip names.

Other analysts are less charitable in their appraisal of the market. Some say many investors--institutional and individual--appear to be doing little more this year than playing the market’s momentum, meaning buying what is already moving up.

That at least partly explains the frenzy for Internet-related stocks in recent weeks. Yet even with the stunning gains in those issues--most of which trade on Nasdaq--the trend in the small-stock market remains disappointing:

* Since June 15, when the U.S. stock market hit its recent low after a spring sell-off, the Russell 2,000 index of smaller stocks has risen 6%. The blue-chip S&P; 500, by contrast, has jumped 8.3% since then.

* The Nasdaq market’s “breadth”--the number of stocks rising versus the number falling--has remained weak since mid-June even as Wall Street’s general mood has improved sharply, thanks to waning worries about Asia’s economic crisis.

In the week ended June 27, a total of 2,732 Nasdaq stocks rose while 2,404 fell. Last week winners had an even narrower edge over losers.

By contrast, winners outnumbers losers by a wide 2,440 to 951 last week on the New York Stock Exchange, the home of most blue-chip stocks.

*

It’s true that bigger stocks have, on balance, been better performers than smaller stocks since 1994. But with the market’s rebound since mid-June, some analysts at least expected a repeat of last summer--when smaller stocks zoomed for several months after a spring decline.

Between June 2 and July 28 last year, the Russell 2,000 index rocketed 10%, far exceeding the 5.7% gain in the S&P; 500.

This summer there is no such joy in Small Stockville.

The irony of small stocks’ continued underperformance is that many Wall Streeters agree that smaller issues in general are much greater bargains than bigger stocks. Many smaller companies’ earnings are growing faster than earnings of blue-chip companies, yet smaller stocks often sell for lower price-to-earnings ratios.

Even so, James Collins, head of Insight Capital Research in Walnut Creek, Calif., and a small-stock proponent, concedes there’s no telling when investors will get over their current aversion to smaller issues.

In the meantime, he says, there are still a decent number of smaller stocks rallying at any particular time, “but you have to really pick your way through this carefully.”

TICKER TALK

Merrill Lynch & Co. analyst Judah Kraushaar helped send shares of Citicorp and Travelers Group soaring Wednesday with a bullish report on their planned merger to form Citigroup. He’s forecasting earnings per share of $4.20 in 1999, up 20% from an estimated $3.50 this year.

Kraushaar calls Citigroup “a new model for the millennium” and says it will possess “unparalleled business diversification” in financial services, including brokerage, banking, insurance and credit cards.

*

Tom Petruno can be reached by e-mail at [email protected].

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Thin Rally

The Nasdaq composite stock index hit a new high on Wednesday, but the number of Nasdaq stocks rising barely exceeded the number falling. Nasdaq winners and losers each week for the last three weeks:

July 4

Nasdaq issues rising: 2,644

Nasdaq issues falling: 2,411