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TECH WORLD: Full Recovery by NASDAQ? Not Yet.
By Andrew Neyens, Optionetics.com
4/1/2005 11:15 AM EST

http://optionetics.com/articles/article_full.asp?idNo=12175

The late nineties in the tech sector was an extremely exciting time for the bulls, at least until the bubble started to burst in April of 2000. In fact, the NASDAQ Composite

($COMPQ) made its all-time high on March 10 of 2000, closing at 5048.62. Of course, we are still a long way away from those levels, even though it was more than 5 years ago. All indications say that even though tech issues should improve over the next 12 to 18 months, it will still be a long time before we get back to the March of 2000 high.

There are many reasons for this very cautious view of the NASDAQ market primarily because the index still remains almost 60 percent below its high, even though it is over 80 percent higher than its bear market low. Compare this to the Dow Jones Industrial Average ($INDU), which contains the Big Cap Blue Chips, and you can see it is only about 10 percent from its all time highs. This has kept eager technology investors cautious and from jumping back in with both feet.

But just in case this is not enough by itself, technology investors who experienced the bubble only have to look as far as past bubbles to realize that getting back to those high levels will be a long journey indeed. Looking at past bubbles—like the stock market crash of 1929, the gold fever in 1980 and the incredible surging Nikkei stock index in 1989—only the Dow Jones could come back to exceed its 1929 high; however, even this turned out to be a very long road back. For example, according to Ned Davis Research, it took more than 25 years for the Dow Jones Industrial Average to exceed its 1929 high after plummeting 89 percent during the crash. Obviously these types of feats do not happen overnight.

Many stock market analysts refer to the tech meltdown as the perfect bubble because of the way it was created. In the late 1990s you had two dominant themes that went hand in hand. First, were the Y2K concerns prompting businesses and individuals to spend money on the latest technology equipment. Second, you had this very rapid emergence of the Internet. These two key catalysts combined to fuel a buying frenzy that caused the NASDAQ to surge to levels never seen before. However, both of these factors turned out to be one-time events, which resulted in the perfect bubble.

In addition, a lot of the smart money has long since moved to other sectors that have shown the greatest price appreciation like steel, real estate and oil stocks. This has held the NASDAQ back since it has not shown much price appreciation compared to these other areas which has kept much of the so called smart money from flowing back into tech stocks.

Another key factor holding the NASDAQ back is that you simply do not have the profit growth among the tech giants as you once had. For example, consider both Microsoft (MSFT) and Cisco Systems (CSCO), which had huge market caps in the late nineties. In 1999 Microsoft’s earning grew over 40 percent and Cisco’s earnings grew 32 percent. Analyst’s earnings estimates for Microsoft in 2005 are just 4 percent and for Cisco it is around 14 percent according to Thompson First Call. Until earnings pick up to much higher levels look for money flow and thus large stock price appreciation in the tech arena to come slowly.

Happy Trading.




Jeff Neal
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site