General Commentary
Bolstered by renewed confidence in the tech sector, the Nasdaq Composite has risen in 14 of the last 15 sessions. The index now sits near the upper-end of its recent trading range. Can the index break through the 4300-4400 area and power on to new highs? Or will the tech rally fizzle out again, resulting in continued consolidation? The answer might not be known for another week or two, but Briefing.com contends that the current advance is running on fumes.
The current rally has as much to do with excitement over the more neutral Fed tone, as it does with investors trying to get a jump on the typical seasonal rally. Not to discount the importance of the change in Fed temperament, but ultimately it is earnings that drive prices. And despite the current optimism, this isn't going to be a typical Q4 for the sector, in that it will be the first time in years that the growth rate of tech earnings slows from the prior year period. Growth will still be solid, but the soft comparisons will raise questions about the future pace of growth. These questions will cause valuations, which remain historically high, to be compressed.
The good thing is that the market won't begin to focus on earnings for another couple of weeks (when earnings warning season begins). With the upcoming data unlikely to alter the now popular belief that the Fed is done, stocks could keep going. Bullish sentiment will also be reinforced by the following sector-related conferences: CSFB Communications Technology Conference, Robertson Stephens Internet Conference and Salomon Smith Barney Tech2000 Conference. But given the overextended nature of the current advance the pace of gains will slow (again). Consequently, even if the sector bias remains positive for another couple of weeks, we doubt the Nasdaq will pierce the 4400 barrier. Failure to do so, along with the the advent of earnings warning season, will be enough to scare investors back to the sidelines. While the breadth of the rally has been impressive, the conviction on the part of buyers has been suspect.
Those groups exhibiting the most impressive relative strength, and thus likely to perform the best again this week, are the fibre channel, PC, storage, fiber-optic/telecom equipment and software stocks.
Briefing.com 05-Sep-00 |
