Dow Jones 12280.32 +70.51 4:20 pm PDT, June 9, 2008 NASDAQ 2459.46 -15.10 For info, visit access.smallcapnetwork.com S & P 500 1361.76 +1.08 Change your subscription status here Russell 2000 735.25 -5.12 VOLUME 08 : ISSUE 54 The Dow's Up, The NASDAQ's Down - A Message? In my morning comments I mentioned a blaring disparity among the indices. The S&P 500 and the Dow Jones Industrial Average both looked like they were fighting an uphill battle, while the NASDAQ and the Russell 2000 seemed to be holding up relatively well.  After seeing today's action - which was pretty much the opposite of what I just described - I think there are a handful of things we all need to start thinking about. The first is, why? The second thing I believe we all should start to consider is how you can capitalize on the disparity (and its potential correction).  We'll dig into both themes today. We'll follow that up with some sector/industry highlights.    What's up with the Dow (or Not Up)? If you're thinking the last month has been one of rotation out of the Dow's stocks and into more aggressive names, that's understandable. And, if you're thinking today's the opposite - a flight to safety - that's understandable too. I would have thought the same. However... After looking a little deeper, I'm thinking that may not be the only thing going on here. Take a look at the nearby table of the Dow's stocks and their recent percentage performances. I've ranked them by their one-month percentage returns. See anything intriguing? Of the bottom five performers, four of them were banks or financial institutions. The fifth one was Boeing, but the point is, all four of the Dow's financials have been dragging the index down. Just for perspective, let's take out the four financial stocks and compare the average return of the Dow 30 with and without those stocks. That data appears at the bottom of the table. Paints quite a picture, huh? Though a difference of only one percentage point may not seem like much, for a one-month period, that's quite a bit. The disparity has actually gotten worse more recently. Today the Dow was in the black with a 0.58% gain. Had you taken out the financials though, the blue chip index would have gained about 0.8%. That's not much for one day, but string a few of them like that together and things get interesting. So again, the concerns about financial stocks get bigger the more you zoom in. And what's the point? There are actually two:     Don't fear the Dow - Fear the financials. Lehman should be proof enough of that.  Taking the financials out of the equation, today really might be the beginning of rotation into safer names, though it's still too soon to make that call (one day does not a trend make...or break).  Speaking of Lehman, I few readers have asked about our thoughts on the ongoing fallout from the mortgage crisis, and the upside of all the capital being raised.  There's no easy answer there. It's still a mess, and there are still more write-downs to be taken. The only 'good' I see is that the whole problem is at least exposed now, so investors can get a grip on the problem. But, much of the problem will continue to linger throughout 2008, adding to the $250 billion in mortgage write-downs already taken by the industry. In other words, it'll be worse before better, but the end is in sight. As for the capital-raising from many of the big banks, it was largely celebrated. I'm not as impressed. In case the spin-doctors massaged the message before you got it, these companies are not raising capital because they want to invest in growth; they're raising it to remain solvent. Yeah, I guess survival is good, but I'd prefer they not dilute their float just to cover their you-know-what.  Anyway, the story's old-hat now - it's just not over. It's possibly going to make the Dow underperform in the meantime.   Industry Insights If you're looking beyond indices and the broad market, and focusing more on things like industries, then here ya' go.  I'm a big fan of sector trends and sector rotation, and always searching for the market's hot pockets. After I stopped trying to water my portfolio down and/or fight an uphill battle by owning a little of everything, my bottom line results started to improve. Since then, I've followed industry performances like a hawk. (FYI - Warren Buffett thinks the same way.) Despite the market's choppiness of late, a few arenas have gotten my attention as consistent performers. I personally think each of these industries may deserve a closer look on your part. Retailers - Retailers, in the middle of a recession? Well, not all retailers. I just had to use the group because I can't drill down into anything more specific. The key to it can be summed up in two words...Wal-Mart (NYSE: WMT). Wal-Mart and other discounters have been the beneficiaries of tightened belts. Though WMT looks a little over-extended now, a name like Family Dollar (NYSE: FDO) may still have some untapped potential. There are several to choose from though. Heavy Construction - Say what you want about homebuilders, but the heavy construction stocks have been hot. I don't think the dynamic that fostered that strength is going to taper off anytime soon (like a relatively weak dollar, and consistent need for infrastructure). Perini (NYSE: PCR) and Layne Christensen (NASDAQ: LAYN) - a company we featured a few days ago when they got blasted despite a great quarter - are interesting.  Specialty Chemicals - There's certainly no surprise to see a basic materials group in my select list, nor is there much surprises to see a chemical industry in the mix Just to be clear though, I'm specifically watching specialty chemicals ...which predominantly means agricultural chemical. These stocks have just been amazingly consistent at making new highs after modest pullbacks, unfazed by other market action. As tempting as it may be to jump on a Potash (NYSE: POT) or Mosaic (NYSE: MOS), I think I'd be more apt to consider a lesser-known name that hasn't been pushed beyond a reasonable valuation.  Anyway, just a handful of ideas. I'll try and keep tabs on them in the 'Industry Trends and Sector Rotation' section of the home page.     We Value Your Feedback   Got comments, questions or suggestions? 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