Tech stocks may never be the same again
December 21, 2000 12:00 AM PT
by Thomas Coyle
Upside.com
NEW YORK -- There is a distinct possibility that the technology market will never be the same again.
Wednesday's sharp decline of the tech-rich Nasdaq -- its seventh in a row, and another in a long line of precipitous drops stretching back to late last winter -- was a body-blow to investor confidence.
All that matters
"Utter chaos" was the label Brian Belski, a market strategist for US Bancorp Piper Jaffray, chose for Wednesday's trading session. "This is a stereotypically emotional market."
The immediate reasons for the market's jumpiness -- the Federal Reserve's grim economic outlook coupled with its inaction on interest rates, and mega-brokerage Merrill Lynch's downgrades of three tech heavyweights -- are almost beside the point.
Even tech's longer-term debilities -- the airiness, bordering on idiocy, of the dotcom run-up, the reliance of communication companies on vast and risky capital expenditure amid increasing competition, and declining demand for computer hardware -- fade to insignificance as the market enters a phase of rare, and potentially debilitating, technical anomaly.
"This is not just a market correction," said Donald Coxe, Harris Bank's chief strategist and chairman of its Equity Fund. "This is a triple waterfall."
A triple waterfall is a three-stage market decline that follows a sharp upward spike. Its principal effect is to alter permanently the pattern of trading by destroying investor confidence in the sector around which the market's enthusiasm had previously centered.
Coxe could point to only four marketwide triple waterfalls this century. The first was on Wall Street in 1929. No. 2 was more prolonged: the U.S. market collapse of 1973 through 1975. Then came the triple waterfall that roiled the Japanese Nikkei from 1989 through 1995. And now, Coxe said, it's the Nasdaq's turn.
"I wasn't sure I'd live to see another one," said Coxe. "They're so rare."
Anatomy of melancholy
Coxe's description of a triple waterfall bears an eerie resemblance to the Nasdaq's performance over the past 12 months.
"You have a final run-up that sucks up all the available oxygen," he said, delineating behavior that mimics the Nasdaq's run-up from mid October 1999 through late March 2000. "By then even the skeptics are aboard -- skeptical fund managers get in because they're losing clients."
After a bubbly run-up comes an initial drop (read late March through late May 2000), followed by a rally that quickly runs out of steam and drifts sideways (June through mid-July).
Then the real trouble starts. Although the first dip in a triple waterfall may look like groundless panic in retrospect, the second decline is triggered by news of shrinking corporate revenue -- which sounds a lot like the ill tidings from telcos that first whacked the Nasdaq in mid-July.
Then the market, buoyed by its brawnier issues, might recover a tad -- remember August? -- but, in a triple waterfall, it soon resumes its southward route -- as the Nasdaq did right after Labor Day.
Then comes the third and last phase of the triple waterfall, when "safe haven" stocks -- Coxe mentioned Intel (INTC), Microsoft (MSFT), Hewlett-Packard (HWP) and IBM (IBM) -- start wasting away.
"These older stocks become the basis of the margin accounts," Coxe said, in describing what he termed "the early stages" of a market's final slide over the precipice: the fall of the stocks on whose strength other more speculative plays had been financed. "As these leaders collapse they're being pulled down because of the need to create 'marginability.'"
Decline and fall
"We didn't know [the triple waterfall] was for real until Cisco broke $50," said Coxe, who cited the giant networker as the stock that best "encapsulated the mania." Cisco closed under $50 for the first time this year on Oct. 12.
And so, if Coxe is right, and the Nasdaq is still in the early innings of its decline, when will a bottom finally heave itself into sight?
"It won't be over until the same people who said that nothing could go wrong [when the Nasdaq was] at 5,000 start saying that nothing can go right [when the Nasdaq is] under 2,000," Coxe replied.
But even that might not signal tech's return to its former glory. "When this market comes back, it won't be led by tech," Coxe said, "because what you're destroying is a belief system."
Despite his severe prognosis, Coxe said he saw an upside -- albeit a fairly esoteric one -- to the Nasdaq's decline.
"This is a fascinating time for students of human nature," he said. "It's like the plot of a Jane Austen novel."
Look back in anguish
Those with scant affinity to early 19th century literature might find a closer analogy to recent events in John Kenneth Galbraith's "The Great Crash," first published in 1955.
"Since a speculative collapse can only follow a speculative boom, one might expect that Wall Street would lay a heavy hand on any resurgence of speculation," Galbraith writes in a passage outlining ways in which a repetition of the 1929 crash might be forestalled. "The Federal Reserve would be asked by bankers and brokers to lift margins to the limit; it would be warned to enforce the requirement sternly against those who might try to borrow on their own stocks and bonds in order to buy more of them. The public would be warned sharply and often of the risks inherent in buying stocks on the rise. Those who persisted, nonetheless, would have no one to blame but themselves."
Thomas Coyle is the markets reporter at UpsideToday. If you would like to submit a letter to the editor regarding this story, email online@upside.com. |
