A Leadership Rally

The Street has an article about the strong investment among mutual funds in just three Internet stocks: Amazon, Ebay and Yahoo:

Many market pundits assessing the meteoric rise of the Net's big three, as well as other phoenix-like Internet risers such as Barry Diller's InterActiveCorp, notch it up to questionable momentum chasing by mutual fund managers. Indeed, "institutional herding" -- when mutual fund managers dog pile into (or out of) a hot stock or sector as a group -- clearly is at work in the Internet sector.

One of the points of the article is that this herding has been behind the rise of these stocks over the last few months and could be dangerous down the road if these same mutual funds decide to get out as fast as they got in:

While it may hearten mutual fund investors to know that few individual funds are loaded to the gills with a few frothy stocks, investors who own shares of the three companies should be alert. The across-the-board ownership of Yahoo!, eBay and Amazon.com is cause for alarm if funds that have been jumping in start getting out at the same time.

This large ownership by mutual funds should not come as a surprise, we are in a classic leadership rally. Sure, in percentage terms smaller companies like CNET, NetFlix and Ask Jeeves have seen larger gains in their stocks. But the big story of this stock market for the next few years will be about the established giants getting more established and more giant. Bigger company stocks run up first which then gives those companies a currency to buy smaller companies whose stocks haven't run as much (e.g., this morning Yahoo announced the purchase of Overture). That drives the big company stock up even higher (at this writing, Yahoo is up 2.5% on the news) and the cycle continues.

Over time, the momentum will slow in the big stocks and institutional investors will begin to look more broadly at the next wave of names. Plus new smaller companies will go public and excite the investing community on the higher growth rates available. But as the current stage of Internet investing continues, expect to see more froth at the top.