Why the Tech Stocks have been selling off and what to do as the selling intensifies this Fall:
Things are getting more interesting these days in the market. Lately, we have witnessed broad, unabated selling. However, the selling has neither been frantic nor emotionally driven. Instead, the recent selling appears far more orderly than it has been historically.
This is a clear indication that the impetus behind the selling is the result of changing expectations rather than swings in sentiment. The selling we have been witnessing lately is most likely due to the market starting to discount the fact that an economic slowdown may last longer than previously anticipated. This means earnings will not pick up as quickly as was once believed. But if earnings growth continues to stall, the P/E multiple should fall as well.
There are two ways a P/E multiple can go lower. Either prices fall or earnings rise. That is effectively the dilemma the market is currently in. If earnings do not rise, if growth does not re-accelerate, prices will continue to fall until the market's P/E multiple reverts to its historical level.
The key to prospering in the market(and in Life) is to not follow the crowd. When everyone and their brother is buying tech stocks, it usually is a good idea to short the sector. Similarly, when the market is collectively selling, it usually is a good idea to be buying.
I think the NAZ is going lower over the short term, but I continue to think that the NAZ remains the best place for an investor to earn returns over the long haul. While it may take until the third or fourth quarters of 2002 for earnings to recover, the general trend over time is for companies to increase their earnings. This trend will continue, regardless if the current recession proves to be longer than anticipated. For this reason, it makes sense to me to buy on weakness in early October, or risk missing any broad recovery rally.
It's certainly a euphoric feeling to make a great short term trade. But just ask any baby boomer how he or she accumulated wealth over time and you will hear that they bought low when very few wanted to buy and held on. Such an opportunity is coming in early October. |
