Could this be the Big One?
Wall Street analysts have worried for months that technology stocks, seen by many as the Wall Street market's major fault line, would finally crack. They saw signs of it this week as investors frantically swapped high-tech shares for more down-to-earth industrial stocks - creating what some analysts feared might be a tectonic shift out of tech issues.
All week, investors threw out the darlings and took in the dogs, exchanging IBM, Compaq, Microsoft and Cisco for the likes of International Paper, Boeing and Minnesota Manufacturing and Mining. Smokestack companies that hadn't seen significant buying action for a long time were suddenly very popular.
"This is the most powerful sector shift I've ever seen, and it's by the handbook too," said Arthur Hogan, chief market strategist at Jeffries & Co. in Boston. "Everything technology is being sold, and everything industrial is being bought."
The Dow Jones industrial average, which is heavily weighted in the newly popular stocks, hit new heights every day this week, closing Friday up 31.17 at 10,493.89. The Dow was up 320.05 for the week and 14.29 per cent so far this year.
But the Nasdaq composite, in which technology shares are prominent, ended Friday at 2,484.04, down 37.73 for the day and 109.01 for the week. The S&P 500 closed Friday at 1,319.00, down 3.86 for the day and 29.35 for the week.
Has the stress of leadership finally caused technology shares to crack?
"There are a lot of things that lead us to believe this could be an extended shift," said Robert Freedman, a portfolio manager at John Hancock Funds in Boston. "Whether this is permanent, I think it's probably a little premature to say."
The big industrial stocks have some staying power, some argued, because they are benefiting from fundamental economic trends. The world economy is said to be improving, helped by scores of worldwide interest rate cuts since October.
A healthier global economy should help U.S.-based industrial companies that rely on income from exports. In addition, commodity prices are recovering from very low levels, giving companies that produce raw materials like oil and paper a chance to raise prices and improve earnings.
Oil prices, for example, have been on a tear for several months, closing at $17.33 US a barrel on Friday. They haven't been that high since February 1998.
But economists caution that, while a worldwide recovery may be coming, they haven't seen hard evidence of it yet. "We continue to feel that global recovery is next year's story," writes Prudential Securities' chief economist Dick Rippe.
And eventually, there is a risk - although it's not evident now - that higher commodity prices will prompt the inflation-wary Federal Reserve to tighten domestic interest rates, warns Larry Wachtel, market strategist at Prudential.
As for technology stocks, have they built the longest-running bull market in history on a house of cards?
Computer sales, at least for the rest of this year, look dicey. After PC maker Compaq warned earlier of potential problems, this week it was Intel's Sun Microsystems' turn. Both warned of potentially softer sales in the second half of this year.
The immediate problem for the computer industry is that many companies have already made the purchases necessary to cure Year 2000 problems, and they're not likely to make more improvements soon, said Charles Crane, chief market strategist at Key Asset Management.
"The information technology departments of major companies are signaling fairly vividly that they intend to curb their spending in the second half of this year," Crane said.
Some market watchers also wonder if investors' fascination with the Internet might be over. Richard McCabe, a technical analyst at Merrill Lynch, said the market's "expectations outrun reality."
But no one is arguing that the Internet, which has revolutionized the economy and helped send the stock market to dizzying heights, is a mere fad. More likely a fad, said Hogan, is the current romance with the more staid industrials.
Investors are "just coming out of overheated groups and buying the beaten-up ones," Hogan said. "As soon as we say it out loud, I think it's going to be over. People will be buying technology again."
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