Revenge of the large caps

Revenge of the large caps

December 16, 2006

Different phases of market favors different groups of stocks. In the early years of the move small caps dominated the cycle. Large caps were languishing. The bull phase, which started in July has large number of large caps dominating the action. There has been a steady breakouts in large caps. I have been telling couple of traders whom I mentor for last couple of months, look at large caps, the elephants like them and are buying them aggressively.

Look and study this list carefully:
AIG,American Internat Group (Google  Yahoo  Earnings BW  Chart) 
AZN,Astrazeneca Plc (Google  Yahoo  Earnings BW  Chart) 
BAC,Bank Of America Corp (Google  Yahoo  Earnings BW  Chart) 
BCS,Barclays Plc Adr (Google  Yahoo  Earnings BW  Chart) 
BP,Bp Plc (Google  Yahoo  Earnings BW  Chart) 
BRKA,Berkshire Hathaway Cl A (Google  Yahoo  Earnings BW  Chart) 
C,Citigroup (Google  Yahoo  Earnings BW  Chart) 
CHL,China Mobile Ltd (Google  Yahoo  Earnings BW  Chart) 
COP,ConocoPhillips (Google  Yahoo  Earnings BW  Chart) 
CSCO,Cisco Systems Inc (Google  Yahoo  Earnings BW  Chart) 
CVX,Chevron Corp (Google  Yahoo  Earnings BW  Chart) 
DNA,Genentech Inc (Google  Yahoo  Earnings BW  Chart) 
E,ENI SpA ADS (Google  Yahoo  Earnings BW  Chart) 
GE,General Electric Co (Google  Yahoo  Earnings BW  Chart) 
GOOG,Google (Google  Yahoo  Earnings BW  Chart) 
GS,Goldman Sachs Group Inc (Google  Yahoo  Earnings BW  Chart) 
GSK,Glaxosmithkline Plc Adr (Google  Yahoo  Earnings BW  Chart) 
HBC,Hsbc Holdings Plc (Google  Yahoo  Earnings BW  Chart) 
HPQ,Hewlett-Packard Co (Google  Yahoo  Earnings BW  Chart) 
IBM,International Business Machines Corp (Google  Yahoo  Earnings BW  Chart) 
ING,ING Group N.V. (Google  Yahoo  Earnings BW  Chart) 
INTC,Intel Corp (Google  Yahoo  Earnings BW  Chart) 
JNJ,Johnson & Johnson (Google  Yahoo  Earnings BW  Chart) 
JPM,JPMorgan Chase & Co (Google  Yahoo  Earnings BW  Chart) 
KO,Coca-Cola Co (Google  Yahoo  Earnings BW  Chart) 
MO,Altria Group Inc (Google  Yahoo  Earnings BW  Chart) 
MRK,Merck & Co (Google  Yahoo  Earnings BW  Chart) 
MSFT,Microsoft Corp (Google  Yahoo  Earnings BW  Chart) 
MTU,Mitsubishi UFJ Financial Group Inc (Google  Yahoo  Earnings BW  Chart) 
NVS,Novartis Ag Ads (Google  Yahoo  Earnings BW  Chart) 
ORCL,Oracle Corporation (Google  Yahoo  Earnings BW  Chart) 
PEP,Pepsico Inc (Google  Yahoo  Earnings BW  Chart) 
PFE,Pfizer Inc (Google  Yahoo  Earnings BW  Chart) 
PG,Procter & Gamble Co (Google  Yahoo  Earnings BW  Chart) 
PTR,Petrochina Co Ltd Ads (Google  Yahoo  Earnings BW  Chart) 
RDS.A,Royal Dutch Shell plc Class A ADR (Google  Yahoo  Earnings BW  Chart) 
RDS.B,Royal Dutch Shell plc Class B ADR (Google  Yahoo  Earnings BW  Chart) 
SNY,Sanofi-Aventis (Google  Yahoo  Earnings BW  Chart) 
STD,Banco Sntndr Cen Hsp Ads (Google  Yahoo  Earnings BW  Chart) 
T,AT&T Inc (Google  Yahoo  Earnings BW  Chart) 
TEF,Telefonica Sa (Google  Yahoo  Earnings BW  Chart) 
TM,Toyota Motor Corp Ads (Google  Yahoo  Earnings BW  Chart) 
TOT,Total Sa Ads (Google  Yahoo  Earnings BW  Chart) 
UBS,Ubs Ag Ord. Shares (Google  Yahoo  Earnings BW  Chart) 
VOD,Vodafone Group Plc (Google  Yahoo  Earnings BW  Chart) 
VZ,Verizon Communications (Google  Yahoo  Earnings BW  Chart) 
WB,Wachovia Corp (Google  Yahoo  Earnings BW  Chart) 
WFC,Wells Fargo & Co New (Google  Yahoo  Earnings BW  Chart) 
WMT,Wal-Mart Stores Inc (Google  Yahoo  Earnings BW  Chart) 
XOM,Exxon Mobil Corporation (Google  Yahoo  Earnings BW  Chart) 


Look at this list carefully. If you are chart reader look at their charts. 70% of the companies in above top 50 companies by capitalisation have had 20% growth in their price in last one year. Out of the 30 % laggards some have recently broken out on huge volume like GE and C. Now no matter the methodology you were following this buying was evident for long time. The charts clearly show that.

The problem why many missed out was due to their belief and hypothesis. I saw TV pundits and macro commentators and the big picture kinds rushing to proclaim that there are only 30 stocks in Dow Jones Index, when it climbed above a significant milestone. That should take the cake for dumbest statement of the year. See how many stocks moved much beyond that level after that dumb statement. Everyday I am amazed at so much of bullshit is sold as analysis by pundits in mainstream media.

Large number of traders missed out on this opportunity, primarily because of the change in market focus. Once you become comfortable trading small caps, you continue to look for opportunities in them, while the market shifts and by the time you realise it best parts of the move is over. The elephants love different things at different times. Part of it is driven be earning cycle dynamics. Also most astute observers and students of market know that in later phases of long duration rallies the focus shifts to larger cap stock.

After years of under performance, the big companies have re-engineered their business, have cut cost, sold bad businesses, are cash rich and buying back shares aggressively. Several CEO's are under intense pressure to see meaningful increase in their share price. Many are handily beating analyst earning expectations.That is getting reflected in their price currently.

The key is to look at large caps which are in their early stages of earning cycles. For example look at a company like IBM, after a major restructuring , it is just about starting to get its act together. Like this there are number of large caps which are in early stages of their earning cycle recovery. It has been my observation that such businesses just do not go back in to trouble immediately. Yes there will be price corrections, but some of the large caps are in early stages of their earning and price acceleration cycle and they have more upside ahead of them.


Studying earning cycles can help you identify such opportunities. Studying market history can help. Tracking number of large cap breakout as % of breakout on daily basis can help. Having flexible mind can help. Having critical mind to challenge others assumptions and mis guided statements helps.

The current focus has been on large caps. That being said a small cap with a meaningful catalyst like blowout earning (GROW, IIG, AXR, IAAC, etc)will always beat a large cap in % growth.