Mad cow disease in humans usually has a 16-month progression: tremors,
an unsteady gait, followed by slurred speech, joyless laughter, and
finally stupor and death. The technology sector has now had a year of
Mad Stock Disease-and investors, while not dead are in a stupor. Is
recovery on the way?
Strange Market Behavior
Let's go to the tape of the Wilshire 5000, the broadest indicator of
market performance. Since the high on March 24, 2000 and the low on
April 4, 2001, almost five trillion dollars has evaporated. That leaves
about 11 trillion in the index. The crazed Nasdaq is almost - but not
quite-"committable."
Which begs the question: Is it time to invest in Tech, again?
Back to the tape. The Nasdaq dropped 25 percent in the Q1 (January -
March) on top of the 39 percent it dropped last year. So, by the
beginning of April, this index was down a maniacal 65 percent from the
peak reached only one year ago. Obviously, feeling sick, investors have
recently culled more of their mutual funds than they bought -- to the
furious level of about three billion dollars. That's the worst
redemption since 1998 when world financial markets seemed on the brink
of burning due to contagious diseases in Asia, Russia and the geniuses
at a massively leveraged hedge fund called Long Term Capital.
In between there have been rallies. Last summer, for example, the Nasdaq
gained almost 35 percent -- only to be sent back to bed. There have also
been a number of dead cat bounces. These occur when the shorts
cover. This causes upward price pressure that is not driven by
fundamentals (such as earning growth).
In the current market, downgrades are overwhelming upgrades by about 20
to one. Among recent downgrades are companies as diverse as PMC-Sierra,
American Express, Vitesse Semiconductor, Proctor & Gamble and Coca Cola.
Many analysts have different opinions about the same stocks. In recent
days, Cisco and J.P. Morgan, for example, have been both upgraded and
downgraded. This could be a dangerous bear trap for unsophisticated
investors. Then again, it could be a buying opportunity.
Professionals, such as Barton Biggs (Morgan Stanley), have been
warning investors that current data do not yield not signs of recovery,
but rather, provide indicators that sickness is spreading. Alan Abelson,
writing in Barron's (April 2) put it this way: "True bear
markets like the one we're in don't end with stocks still greatly
overpriced and everyone on the alert for the turn. They end with
valuations almost as depressed as those relatively few investors still
standing." Complying with the new Fair Disclosure Rules I must note
that Abelson is perpetually negative. He loves to rain on passing
parades -- especially if they celebrate technology.
So how do we make sense of the fact that from April 4 to May 1, the
Nasdaq rallied 35.5 percent? Or, that the Internet Index on CNBC
was up 62 percent during the same period? And in a gesture to the steak
and cigar days of 1999, how is it that a newly minted stock named
Simplex Solutions (a technology company which makes software for
testing chips) rose 77 percent over its IPO price on the first day of
trading on May 2?
Also, the Dow Jones Industrial Average is up 16 percent from March 22.
The Standard & Poor's Index is up 15 percent since April 4. But the
Nasdaq is still down 10 percent for the year and down 56 percent from
the high last year on March 10. What's going on and how do we diagnose
the patient?
Some spin doctors seem insanely nostalgic for the bull run of last
decade and don't want clients to miss the next stampede. Some
professionals seem to be moving out of money market funds and going back
into stocks. In fact, several major brokerages have increased their
stock allocations. If the markets are a discounting mechanism then is it
telling us that we've hit bottom and the worst is really over? Is all
the bad news is already reflected in current stock prices? Is the time
to buy? Or is the recent run up just a bull rally in a bear market-- and
is there more pain ahead?
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