*** NASDAQ 3000 ***
NASDAQ 3000?
Fasten Your Seat Belts
For a Bumpy Ride
By Gary Gentile
With the Dow Jones Industrial Average comfortably past the 10,000 mark, can NASDAQ 3000 be far behind?
Two weeks ago, many observers would have marked the progress toward that market milestone in weeks or even days. But the recent tech stock bloodbath has most experts revising their estimates and doubting whether the 3000 mark can be even reached by the end of the year.
"This is not a market that has a lot of upside given where interest rates are today," said Charles Pradilla, chief investment officer at SG Cowen Securities Corp. "The same holds, but in spades, for the 'nifty tech' stocks."
Much as the Dow Jones Industrial Average is powered by the fates of a handful of large, blue-chip companies, the NASDAQ index rises and falls with the fates of five main tech companies, according to Tony Dwyer, chief market strategist at Ladenburg Thalmann & Co. As go Microsoft, Dell, Compaq, Intel and Cisco — which together account for 40 percent of the market capitalization of the NASDAQ index — so goes the market.
"The NASDAQ is driven by five stocks and they have become very overvalued and overextended," Dwyer said. "If those five stocks go down, they will drag the NASDAQ down."
The last two weeks have seen an unprecedented flight of money from high-tech stocks into the much-maligned cyclicals, fueling a rally in the Dow and causing record losses in the NASDAQ. Investors seem edgy over valuations and announcements by several tech companies of less-than-stellar earnings.
Some market watchers welcome the shift, calling it a return to normalcy and a long-overdue recognition of the unsupportable market multiples of Internet-related companies. Others say its merely a case of temporary sanity.
"Just because valuations are out of whack doesn't mean they have to come back to reality," Dwyer said. As long as the economy continues to grow and inflation remains in check, valuations can and will go higher, he says.
But what the current heady levels have done is narrow the margin of error in stock valuations. High stock prices are so tentative, even the slightest whiff of bad news can send stocks reeling.
"The problem with the NASDAQ was that with very full valuations, even for the best stories, it left very little room for any kind of disappointment," said Pradilla. "With Compaq and Intel, there were hints there might be pricing and demand pressures on PCs, and people who were doing valuations decided, hey, Dell doesn't belong at 50."
And so the sector rotation out of tech stocks into chemicals and drug stocks. Will the NASDAQ recover? It already has bounced back from Monday's plummet. And despite concerns over valuations, technology remains the driving engine of the market.
"Technology is what is allowing us to move ahead as a nation, resulting in lower inflation, higher productivity," said Paul Hennessey, a principal at Boston Partners Asset Management. "I think you'll see somewhat different valuations on things. Internet companies will always command higher values. As things begin to simmer back down again, a week or two from now, once you turn your head away and you begin not to concentrate on NASDAQ 3000, the thing will begin to eke its way back up."
Dwyer says the NASDAQ will close the year around 2700. Similarly, Pradilla thinks the current tech correction will continue for a while longer before things turn around.
"This digestive period will last a couple of months," he said. "I don't think the downside is over on the techs yet. We've got a rock-bottom minimum of 12-18 months before we see 3000 on the NASDAQ."
For his part, Hennessey says the 3000 mark is possible by the end of the year. "When it happens is not really important," he said. "The fact that you're building towards it is important." |
