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Big-Name Stock Losses Obscure Market Gainers


The stock market, as measured by popular indexes, has fallen for four straight weeks, the longest losing streak in a year. Big-name issues such as IBM Corp. and General Electric Co. are trading at their lowest levels since at least October.

But under the surface, the market doesn't look nearly as bad as the indexes might suggest, analysts said. And that is dispelling some concerns that the 2000-01 downtrend has resumed.

Last week, the blue-chip Standard & Poor's 500 lost 1% and the technology-heavy Nasdaq composite was off 0.8%, bringing their four-week declines to 4.7% and 6%, respectively.

By contrast, the S&P small-stock index jumped 3.5% last week and the S&P mid-size stock index gained 2.2%.

On the Nasdaq market overall, rising stocks outnumbered losers by 2,190 to 1,818 for the week, even as the Nasdaq composite declined.

Wall Street's recent trend is reinforcing the pattern of the last two years: Many stocks continue to do well, but some of the biggest names, and the technology and telecom sectors, are dragging the major indexes down.

"This is the mirror image of 1999, when the S&P 500 headed higher because of the effects of tech and telecom but the majority of stocks were trending downward," said Sam Stovall, investment strategist at Standard & Poor's Corp. in New York.

For investors with diversified portfolios, this market arguably is healthier in that there are more sectors in which to find winning stocks:

* Over the last month, stock sectors such as real estate investment trusts, defense, household products, gold mining, hospitals, insurance and banks have advanced strongly, even as the Nasdaq computer-stock index has fallen 9.3% and the Nasdaq telecom index has slumped 14.7%.

* Of the industry groups in the S&P 1,500 composite index (which is composed of S&P's small-, mid- and large-cap indexes), 81 of 114, or 71%, are in the black year to date, Stovall said.

The problem is that the "market," as many people know it and own it, is dominated by big stocks: The S&P 500, for example, accounts for about 90% of the market capitalization of the S&P 1,500.

In the mutual fund industry, funds that own big-name "growth" stocks hold about $357 billion in investors' assets, according to Lipper Inc. Those funds have fallen 7.1% this year, on average.

By contrast, funds that own small "value" stocks, which hold about $66 billion in assets, have surged 9.7% this year, on average.

Thus, investors who haven't diversified their portfolios to include shares other than blue chips and technology may not be participating in the broader market's strength.

Stovall believes that several factors continue to favor smaller stocks over blue chips: history, because smaller names tend to outperform coming out of a recession; valuations, because small-company stock prices, overall, still are lower than big-company stock prices relative to earnings prospects; and sentiment, because many investors' concerns about accounting issues make them most wary of larger companies, which typically have more complex finances.

Mutual fund managers who have been in the market's sweet spot with smaller stocks over the last two years are at least guardedly optimistic about their continuing prospects.

Warren Isabelle, manager of the ICM/Isabelle Small Cap Value fund in Boston, noted that his fund is up 16.2% year to date partly because of his bet last fall on economically cyclical companies such as specialty chemical makers and aluminum fabricators.

"This looks like a textbook kind of a turnaround, a classic recession recovery scenario," Isabelle said. "Companies with high fixed costs get crushed at the bottom of an economic cycle, but they pay down debt and get lean and mean, giving them the operating leverage to recover strongly when things turn around."

Isabelle said many of his holdings fit that bill, such as chemical makers PolyOne Corp. and Commonwealth Industries Inc. and aluminum producer Crompton Corp.

These stocks have recovered sharply from their depressed September levels in anticipation of a business pickup, Isabelle said, and they could continue to gain if earnings improve in the second half of 2002 along with the economy.

Still, the economy remains a major question mark for stocks of all sizes and sectors, he said.

Analysts will be watching closely this week as many companies report first-quarter earnings, and, Isabelle said, April business orders also will be important to watch for signs of sustained demand across the economy.

"The question is whether company managers have just been making readjustments to their inventories or whether they are gearing up" for sustained strength in the economy, he said. "I have to keep looking out of the corner of my eye, because there have been so many false signals in this market."

Jon Burnham, manager of the Burnham Fund in New York, which focuses on large-cap stocks, also is cautious in his optimism.

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