The Dichotomy of the Market

It appears that there are two markets. There is the market for the high flier stocks such as Salesforce.com (ticker CRM) with a price to earnings ratio of 195. Then there is the market for small cap stocks like SinoHub (ticker SIHI) trading at a price to earnings ratio of 3.

Now it appears obvious to me that you should buy the cheap stock and short (or sell) the expensive stock (which I have done). Certainly there is more to fundamental analysis than this high level approach, but for the purposes of this blog I want to keep it simple to make a point.

The market however continues to support the price of the high fliers while continuing to sell the cheaper stocks. I expect that this trend will reverse itself at some point and this will be a signal that the momentum has shifted and that growth stocks are out of favor.

The key point here is that growth stocks normally fair well during a bull market if that bull market is occurring on the back of a solid economic base while value plays normally hold up far better during a bear market. As it is my view that due to weak economic fundamentals we are still in a secular bear market. Furthermore I expect that the lows of March 2009 will not hold and therefore I would advise you to exit any of your high fliers and, if you need to replace these with new stocks, look for value plays.