from the toronto star today...
When tech stocks bounce, lighten up your holdings
Last week's bearish stampede in the technology stocks was no surprise to Getting Technical.
Several weeks ago I suggested that low-risk investments are in the financial and energy sectors. On March 19, I wrote about the danger of owning spiking technology stocks these days and published a risk list of Canada's 70 most dangerous stocks.
Is the worst over? Was the action last Friday capitulation, with the last of the technology bulls throwing in the towel and selling at any price?
Some investors got beaten up so badly they may never return to the equity markets. How could so much go wrong for so many investors so suddenly?
I think most stocks and mutual funds can be good investments if you can get the timing right. Most investments are low-risk at the right time and high-risk at the wrong time.
I have a little story that's a good example of the market psychology and conditions that led up to the current bubble. Even the experts have been sucked into the hysteria.
In talking about mutual funds last week, I compared a basket of funds with the S&P 500 index in order to measure their risk. I published a list of risky mutual funds, some here and some on my Web site, and placed the Altamira e-Business Fund on my list of risky funds.
Altamira Financial Services Ltd. of Toronto disagreed with my methodology. Let me share a portion of the comments from the person who was ``elected' to contact me:
``I am not sure that a mutual fund can be compared to an index the same way as stock . . . (The) investments that have driven a fund to outperform the index can be sold and replaced by cheaper stocks causing a significant change in the `risk' profile of the fund.'
I'm sure the author of this e-mail believes that. But I don't. I think that fund managers in specific sectors are under so much pressure to be fully invested that they can't significantly reduce the risk, especially in a hot sector. But the only defence against a bubble is getting out of the sector altogether and into cash.
Furthermore, for all that the e-Business fund is undoubtedly trying to manage the risk, my math says that, as of Friday at least, Altamira's e-Business fund wasn't looking very good against the Nasdaq.
Since March 10, when both the fund and the Nasdaq were at a high-water mark, the Nasdaq has fallen 34 per cent and e-Business 41 per cent.
How come the managed fund is falling faster than the index?
Some stockbrokers and investment advisers had been advising people not to chase the hot technology sector. Many were scorned by their clients as that sector of the market roared higher. Some investors even fled to online or discount brokers to avoid the unwanted advice.
Now investors share a new problem.
If you're fully invested, do you sell? If you have cash, do you buy?
If you think a bear market is on the way, keep your cash.
If you think the bull market will continue, the boost will have to come from somewhere. If the current market leaders have been assassinated, we'll need new leaders. But first we have to find out whether the current crop has, indeed, been killed.
The chart this week shows monthly closes of one of the important leaders, Microsoft Corp., plotted on a logarithmic scale to show percentage gains and losses rather than those in dollars.
The long-term uptrend spans about 14 years and Microsoft has not yet violated this important trendline, even in Friday's debacle. This market leader is not dead yet, but it is in a dangerous trading zone. At the current $74 range Microsoft is right on the important trendline. Now we have to watch it like a hawk to see whether it breaks out to the upside - or the downside.
Watch Cisco Systems Inc., too. At the current $57 range, the stock is only $2 above its long-term trendline.
Watch America OnLine Inc. At $55 or so, it is right on its long-term trendline.
Watch International Business Machines Corp. At about $104, it is right on the trendline. Watch Sun Micro Systems Inc. At $78, it is right on the line.
This coming week will be critical.
My prediction?
I expect these key stocks will hold at their long-term trendlines. If so, we should then see a strong recovery bounce in the technology sector through early summer.
Use this bounce to lighten up on the sector because the group could turn down again and violate the trendlines.
Learn from the Internet dot-com stocks. They broke down last fall and never recovered. |
