Will tech stocks short circuit?

Wall Street interprets shifts in the Nasdaq

Investors will continue to absorb tech shocks. Major indices will go haywire based on Internet-mania, a company’s poor earnings report or a seemingly ill-conceived transaction within the sector.

Just take a look at the Nasdaq Composite Index. From the market rout of October 1998 to February, the Nasdaq surged an electrifying 77% while the healthy S&P rose 33%, according to S&P’s The Outlook, the weekly newsletter on market trends. Between February 1 and February 18, the index lost 10.4%.

It wasn’t alone: volatile tech stocks dragged the Standard & Poor’s 500 down 2.4% over the same period. The less-exposed Dow suffered less, sliding 1.6%. (See be Indicators, this page.)

During the first week of February, IT companies had pushed the Nasdaq up 96.05 points to 2,405, its biggest one-day gain ever. A week later, investors turned their back on the proposed acquisition of Internet portal Lycos (Nasdaq: LCOS) by USA Networks (Nasdaq: USAI), the entertainment conglomerate, causing the index to fall 4%, the biggest one-day nosedive since the market’s bout with the Asian flu. Nasdaq index and market leaders Microsoft (Nasdaq: MSFT), Cisco Systems (Nasdaq: CSCO) and Dell Computers (Nasdaq: DELL), which lead the markets, are also responsible for the tumult. Dell’s disappointing fourth-quarter earnings caused the index to drop another 64.69 points.

Wrote stock picker Louis Navellier in his newsletter, Louis Navellier MPT Review: “It is absolutely critical that the market expands beyond the hot technology stocks that dominate the Nasdaq. Until the leadership of the stock market expands to include more stocks in different sectors, I [feel] obligated to warn investors that the market may stall temporarily.”
S&P technical analysts write that “advisor and investor bullishness is too pervasive and is focused on too few stocks.” In fact, sentiment indicators, chart formations and market internals-measurements of stock price advances and declines-have made “the market, particularly the Nasdaq leaders, vulnerable,” As a result, analysts recommend that investors do not stand by tech stocks alone. They should adjust the weighting of their portfolios to include other sectors.

Alan Bond, Wall Street Week regular and chief investment officer of his money management firm, Albriond Capital, tells investors to “get prepared for more volatility as the sector continues to consolidate over the next few months.”

He further warns: “Don’t try to time the market or take a blanket approach when looking at software companies, chip makers and Internet players. Refine your options.”

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