No replies to this topic

[TTHQ Staff]

BEING STREET SMART
____________________

Sy Harding

Will Small Stocks and Tech Catch Up? February 11, 2005.

Even as the general stock market has made significant progress in recovering from its January swoon, the technology sector and small stocks continue to lag.

The Dow and S&P 500, homes of the larger more conservative stocks, have recovered to the point of being just about back to their December peaks. But mutual funds and exchange-traded-funds (ETFs) that focus on the tech sector are still down anywhere from 4% to 7% from their December peaks.

The divergence can also be seen in the Nasdaq and Nasdaq 100 indexes, home of small stocks as well as many of the popular tech stocks. In spite of the market’s recovery so far in February, the Nasdaq is still down 5%, and the Nasdaq 100 down 6% from their December peaks. In most rallies the tech sector and Nasdaq lead the way higher.

The problems for the Nasdaq and tech sector also show up from the perspective of technical analysis. Our technical indicators triggered a buy signal on the market last November 4. By the end of December they had become overbought and warned of a brief pullback that would test the support at the 20-week moving averages of the major indexes. It took the whole month of January to accomplish that, and so far this month the indexes have been rallying nicely off those support levels. But our technical indicators on the Nasdaq and tech sector turned more negative and rather than calling for only a pullback within the ongoing bull market for the Nasdaq, the technical indicators subsequently triggered an outright sell signal for the Nasdaq and tech sector.

Will the Nasdaq now catch up to the rest of the market? On Friday there was some encouragement that it might. The Nasdaq closed up over 1% on the day, while the Dow and S&P 500 closed up half of that. However, for the week the Nasdaq was down half a percent, while the Dow gained almost 1% for the week. So the divergence continued.

Many investors’ eyes glaze over when we talk of technical analysis, so let’s look at what seems to be wrong with small stocks and the tech sector from the perspective of the fundamentals.

The main problems are probably the widely publicized forecasts that the market will produce only single digit gains on a buy and hold basis for the next several years, and growing warnings from independent analysts, and even some on Wall Street, that overvalued stocks, rising interest rates, and other problems, make the market susceptible to a significant decline sometime this year. Those kinds of concerns usually result in a movement of assets from higher risk areas like small stocks, to the perceived safety of larger companies with long histories of stable earnings. And that shift of assets does seem to be what is happening.

But another problem for the Nasdaq may be the recent hits to the confidence of speculative traders by plunges in some of their favorite Nasdaq ‘story stocks’.
As many analysts have noted, it’s been surprising how quickly speculative investors recovered from the shock to their confidence (and portfolios) created by the implosion of the dotcom stocks in 1999 and 2000, followed immediately by the 77% plunge in the Nasdaq in the 2000-2002 bear market. After such a painful washout, speculative frenzy usually doesn’t re-appear until the next bull market has been underway for some time, and is getting close to its next peak.

But this new bull market got underway from the low in October, 2002, and by last year some of the passion for ‘story stocks’ had already taken on the appearance of the 1999 style frenzy.

However, some of that passion for speculative adventuring may have been tamed at least temporarily by the recent plunges in the likes of Taser International, the well publicized maker of stun guns, which has plunged 60% in the last six weeks, and sharp declines in Sirius Satellite Radio, XM Satellite Radio, and other of the popular story stocks of 2004, where the previously optimistic stories have taken on the appearance of being at least partially fiction.

In any event, I’m sticking with my expectation that we’re still in a bull market, but that given the prospects for serious problems for the market sometime this year, assets should be moving away from small stocks and the Nasdaq, and into safer havens. Given the conditions, the market is acting just as it should at this point in the cycle.

Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report Online at www.streetsmartreport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market.