Tech-Stock Siren Call Lures Market Pros, Too
[A Reference to NSOL in the middle]
By Aaron L. Task
Senior Writer
4/22/99 5:00 PM ET
You are not alone.
Retail investors are oft portrayed by Wall Street and the press as overly infatuated with technology stocks, and thus highly susceptible if tech stumbles, as it did much of last week and, of course, Monday. But many market pros (bears and value players aside) are also praying the action since then, including today, signals that tech has wrested the leadership mantle back from cyclical stocks.
It's not just about ownership, although more than 35% of diversified U.S. stock funds owned America Online (AOL:NYSE), Microsoft (MSFT:Nasdaq) or Dell (DELL:Nasdaq) as of Dec. 31, according to The Wall Street Journal.
It's about sexiness.
Traders bemoaned the rebirth of cyclical stocks because they're just not as "sexy" as high-tech issues, particularly the nubile Internet plays.
Certainly, sexy is in the eye of the beholder, and cyclicals enjoyed some pretty racy gains in the first two weeks of April. But the "problem" is that companies like Alcoa (AA:NYSE) and Caterpillar (CAT:NYSE) have fairly predictable earnings and revenue growth (not to mention actual earnings and revenue). Thus, traders and investors know they can take cyclicals only so far before valuations cannot be justified by even the most optimistic forecast.
Compare that with Internet stocks, many of which have neither earnings nor significant revenue, nor prospects thereof. Thus, traditional valuations cannot be calculated, enabling stocks to trade at stratospheric levels on the projection of potentially generous profit growth sometime down the road, somewhere in the future.
"Risk used to be quantifiable," says Scott Bleier, chief investment strategist at Prime Charter. "Now risk is a purely a qualitative function on a day-to-day basis. There's no corporate development that justifies a 30% or more intraday move, whether up or down. That is simply the measurement of risk being thrown out the window and qualified based on market psychology and herd, gang-tackle mentality. But this is not just daytraders buying Network Solutions (NSOL:Nasdaq) or taking RealNetworks (RNWK:Nasdaq) up 50 in a day."
The historically unprecedented volatility in Internet stocks that results may give "mom and pop" investors agita and cause some pundits to cry that the end of civilization is at hand. But the bottom line is professional traders love it because they believe they possess the savvy to profit.
"If you know the company, know the stock and understand the magnitude of herd mentality, you can be nimble and make some money," says Samuel Ginzburg, managing director of equity trading at Gruntal. "If you can have any kind of feel what people are going out of and into, you can trade. For a daytrader, a market like this is exactly what you want. For someone that's investing, it's tough to invest for the long term, and by that I mean a week, not years."
Someday, This Is Gonna End
This is not to suggest in any way there's some nefarious conspiracy among market players to keep tech stocks at the forefront. There's just a hope they remain so.
"I think people are just generally scared to death of the party ending, and the party has been headlined by technology issues," says Michael Lewitt, a hedge fund manager at Harch Capital Management in Boca Raton, Fla. "What is incredibly scary is that multiples today are vastly higher than multiples were in previous bubbles, and when they come down, it's going to be a bloodbath. The longer this goes, the worse the bloodbath will be. Of course, this is from someone who has been wrong for the last 4,000 points."
Moreover, even as they profit from the head-spinning volatility in high-tech stocks, some traders wonder if the new world order is here to stay.
"In the old days, news or a rumor or a brokerage comment moved the stocks," says Doug Myers, vice president of equity trading at Interstate/Johnson Lane in Atlanta. "Now anything can move a stock -- some guy on a message board, a speculative newspaper article or the rumor of a rumor, and off they go. You're dealing with forces that can't be quantified, predicted or measured. It's very ethereal. You're dealing with ghosts and demons. Traders don't want to go back. It's fun. You sit back and gawk at these stocks that move 20, 30, 40 points a day, [but] if you know how to surf, ride the wave."
But "this too shall pass," Myers predicts. "We can't operate as a nation of daytraders. All these people daytrading at work, are they working as hard as they should be out selling aluminum?"
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