Stock Fund Favorites: When Darlings Get Dumped

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Stock Fund Favorites: When Darlings Get Dumped
How much like 1973 is today?

By Bob Stokes
Mon, 23 Apr 2012 17:15:00 ET

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The three-year stock market rally that began in March 2009 has been driven mainly by institutions. The investing public has mostly stayed away.

This also happened in the rally from 1970 to 1973:

The Nifty Fifty [a nickname for popular blue chips] were taking the S&P and Dow to a new high, above the high of 1968, but the Value Line Index was well below it because the public wasn't participating. Back then, we had an institutional rally after the 1970 low and now we've had an institutional rally after the 2009 low.

Robert Prechter, Financial Sense Newshour interview, March 22

Like then, today's lack of momentum in the overall market has been masked by the performances of blue chips and institutional favorites (Priceline, Google and Apple).

In the first two and a half months of 2012, Apple's stock price climbed 48 percent. But after its April 10 all-time high of $644, Apple's price has fallen ten percent. And as a new trading week kicked off on April 23, investors continued to take a bite out of Apple. Our March 16 Short Term Update saw the signs of a coming reversal:

Apple's share price is increasing exponentially, climbing the wall of a sharply-rising bowl formation. The rate of ascent is inherently unstable, as it cannot be sustained. Once prices break the upward trajectory, they should crack hard and fall significantly...Optimism toward Apple's share price is at an all-time record, as measured by the call/put ratio, which suggests strongly that a reversal is fast approaching.

If Apple and other fund favorites continue to lose their polish, what could that mean for the overall market?

Well, let's return to the 1973 stock market. After funds abandoned the Nifty Fifty, the Dow Industrials took a two-year, 45 percent nosedive (January 1973 through December 1974). At that time this was the worst bear market since the Great Depression. Stocks did not fully recover until 1982.

The similarities between then and now should give any market participant pause. But note: there are also differences.

The biggest difference is the degree of the Elliott wave pattern. And this should give market participants even greater pause. Why?

What are we seeing? Our analysis becomes crystal clear to you through our unique charts and independent commentary.

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Tags: Dow Jones Industrial Average (DJIA), Elliott Wave Principle, hedge funds, investment decisions, investment strategy, mutual funds, Nasdaq Composite, New York Stock Exchange (NYSE), pension funds, S&P 500

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