from the street.com
Tech Rules, but Its Kingdom
Is a Very Strange Place
By Aaron L. Task
Senior Writer
1/20/00 10:10 PM ET
SAN FRANCISCO -- Today had something for everyone,
except those looking for a clear indication of the market's
near-term direction. Welcome to 2000.
As I (among others) predicted, technology stocks held
sway today in the wake of positive earnings posted last
night. Notable gainers included IBM (IBM:NYSE - news)
and Apple (AAPL:Nasdaq - news) (among others),
although Advanced Micro Devices (AMD:NYSE - news)
failed to capitalize on its breaking-the-chains-of-rationality
upside surprise. But while the Nasdaq Composite gained
38 to a second-straight all-time high, blue-chips slumped
again, with the Dow Jones Industrial Average falling
138.
Whether it was a good day or a bad day depends, of
course, on your perspective (and holdings). Either way,
many players are not feeling terribly "comfortable" about
the state of the market. Despite records by the Comp and
Russell 2000 (more on that in a minute), market breadth
soured like so much milk in the Mojave.
"It's a very narrow market [with] worrisome breadth," said
Paul Rabbitt, president of RabbittAnalytics.com in
Hermosa Beach, Calif. "Technically, we're pretty extended
given the run the market has had."
Earlier this week, Rabbitt lowered his recommended equity
exposure to 60% from 70%, simultaneously raising the
bond weighting to 25% from 15%.
Forget for a moment how poorly that 15% bond allocation
likely performed in the 18 months since Rabbitt last
changed his recommended weightings. Focus (please) on
the fact Rabbitt is not a bear (I swear), nor is he suggesting
the stock-market gods are about to seek revenge on all
who dared buy when historical road signs were flashing
"overvalued."
Noting the Nasdaq has suffered "pretty punishing and
painful" springtime corrections in recent years, "it's not that
improbable" to foresee another one coming, the strategist
said. (Especially after the huge run-up to end 1999.)
"There's a bubbly look to the market," he said. "It's wise to
be focusing on a little more of capital preservation rather
than trying to stay ahead of the herd right now."
Rabbitt foresees the Comp falling as low as 2900 by
spring, or a near 31% decline from today's record close of
4189.51. He sees more modest drops of 5% to 7% for the
blue-chip averages.
Still, the analyst remains overweighted in technology,
recommending 32% exposure of the equity allocation, with
favorites including ADC Telecommunications
(ADCT:Nasdaq - news), Lattice Semiconductor
(LTCC:Nasdaq - news), Adobe Systems (ADBE:Nasdaq -
news), Go2Net (GNET:Nasdaq - news) and Seagate
Technology (SEG:NYSE - news).
But he also sees better times ahead for 1999's
stepchildren, including utilities and basic materials, a.k.a.
"value stocks."
Rather than the near-unthinkable trick of outperforming
growth, value stocks will "participate much more evenly"
this year than in 1999, Rabbitt said. "That's as brave as I'm
willing to be."
Some favorites include Consolidated Papers (CDP:NYSE
- news), Weyerhauser (WY:NYSE - news) and Alcoa
(AA:NYSE - news).
Alcoa declined nearly 6% today after announcing a
decision to restart some idle smelting capacity. And while
it may be fun to say "idle smelting capacity," the
announcement wasn't music to the ears of
commodity-focused investors.
Not specific to the Alcoa situation, Rabbitt said "one day
does not make a market" and noted his overall outlook is
"not a trading call." (Good thing judging by today's action.)
For those of you wondering, I was unable to reach Dwight
Anderson of Tudor Investments, whose forecast for a
value-stock revival was predicated on (among other things)
the absence of additional capacity coming on line in many
basic-materials industries.
Why You Callin' Me Shorty?
One reason Rabbitt is optimistic about commodities and
other economically sensitive stocks is they have
historically traded in sync with small-caps and are thus
due to advance, if only to revert to the mean.
As mentioned above, the Russell 2000 set a new high
today -- its fourth straight.
Yet there's an ongoing debate on Wall Street about
whether the Russell's rise signals a broadening of the
market, as has historically been the case. Like seemingly
every other index, the Russell 2000 was goosed by its tech
components last year.
Indeed, if not for the courage (and performance) of the
fearless tech sector (which rose 101%), the Russell 2000's
gain last year would have only been 9% vs. its 19.6%
actual, according to Brad Lawson, senior research analyst
at Frank Russell.
Also, as tech mushroomed into the index's biggest
weighting -- at 23.6% last year -- the Russell 2000 Growth
Index rose over 43% vs. a 1.5% decline for its value
counterpart, he noted. (That's outperformance with a capital
"out," my friends.)
The commonly held view is the same factors are at work
this year. But that isn't necessarily so.
With a gain of 21% heading into today, health care is the
best performing sector in the Russell 2000 so far this year,
Lawson reported. Something called "other energy" (mainly
oil services and drillers) is up 8.9% in the second spot,
followed by technology, with an 8.3% gain.
"Good performance in 1999 was largely tech, but it's been
legitimately broad for the last couple of weeks," he said.
Go figure. So I guess there's nothing to worry about, after
all ... save the fact small-cap outperformance has
historically augured near-term market tops. |
