NEW YORK (CNN/Money) -
The rally in stocks is too close to the 1999 rally for comfort.
As in 1999, this year's top performing sectors in the S&P 500 are tech, consumer cyclicals and industrials, with tech leading by a mile. The best performing industry group within tech is Internet software and services, just like in 1999.
In fact, if your investment strategy this year was to buy the S&P 500's top 10 performers in 1999, you'd be up 77 percent. Two of 1999s top 10 performers, Network Appliance and National Semiconductor, are on this year's top 10 list.
Okay, so we can construct arguments to explain all these similarities away. The top performing sectors are areas that you would expect to perform well during an economic growth spurt, which is apparently what's going on now. And these were also the areas that got whupped the worst in the downturn. During last fall's rout many of them were being priced like their survival was in doubt, which, of course, it was. Now that it seems clear they're going to make it, it makes sense that they carry higher prices.
See, wasn't that easy?
Still, something seems very much awry. The highfliers aren't just running higher like they did in 1999, they're carrying similarly stretched valuations. And analysts don't appear to be batting an eye about them. Monday Smith Barney upped its price targets on a host of semiconductor equipment companies (the group is up 65 percent this year). The analyst gave Novellus, just to pick one, a price target of $53 with an earnings estimate for 2004 of 65 cents a share. So if all goes according to plan, the company should be trading at a little over 80 times earnings.
Another worrisome thing is that grizzled old Wall Street veterans say that when bull markets begin, the new leaders are never the same as the leaders in the previous bull run. The old favorites have been overinvested in, after all, making the field too crowded. It's areas where there are fewer players and too little investment that begin to draw attention when something new starts.
But investors are just jumping back into the places where they lost money the last time around. An article that ran on this site Tuesday, Guided by greed, looked at how investors aren't taking advantage of the rally to sell and offload risk. It drew a couple of letters along the following lines:
"Is this guy from another planet? The majority are trying to recover losses... is that greed?"
To think that the market somehow owes people the money that they lost back is sort of like a slot player feeling like the slot machine owes him back the quarters that he pumped into it. Is there any real difference between playing the market to get rich and playing the market to get back the riches that you used to have (if only on paper)?
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