The Dow Hits 10,000 Again, but the Small Have Gotten Smaller

Last Updated Jan 17, 2010 4:39 PM EST

A late rally on Thursday took the Dow Jones industrial average back above 10,000. It may be churlish to point out that the index made it over the line with less than six points to spare, given that they were the last six points of a 204-point gain, but there is still less to the breaching of the five-digit barrier than there may seem at first.

Prosperity loves company, just as misery does, and the Dow has been more or less alone among major indexes in trying to surpass the interim highs set in mid-October. At the close on Thursday, the Dow sat a mere 0.9 percent below the Oct. 19 high, but the Standard & Poor's 500-stock index remained 2.9 percent lower than its high on the same day.

The shortfalls were greater for the Nasdaq Composite Index (3.3 percent) and especially the Russell 2000 index of smaller companies (6.6 percent). This shows that buyers are narrowing their focus to what they perceive to be the safest issues - the bluest of chips. It is a development that often precedes a downturn.

A market advance is more likely to have legs when smaller companies are outperforming, in part because their fortunes are more highly leveraged to economic growth. Sure enough, the Russell 2000 led the way during most of the rally this year, rising nearly 80 percent from the March low through the October high, compared to just over a 50 percent gain for the Dow.

The reverse is often true at tops. The Russell suffered greater falls in the early stages of the severe bear markets that began in 2000 and 2007, for instance. It's far too early to say that the comparative weakness of the Russell in the last few weeks heralds something similar, but it can't be a good sign.

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