Heat Is On Microsoft, but All of Tech Sector Feels It
Tempting as it may be to blame the latest drop in the Nasdaq composite index largely on Microsoft, some experts warn that the software giant’s woes are just one of many forces working against a recovery in the technology-dominated Nasdaq market.
Led by Microsoft’s worst one-day loss in 13 years, the Nasdaq composite slumped 161.40 points, or 4.4%, to 3,482.48 on Monday as investors dumped a broad cross-section of technology stocks.
Though Nasdaq pared a 298-point intraday loss with a hot rally late in the day, Monday’s sell-off still cut short a nascent tech-sector rebound for the second time this month.
The latest slide suggests that the Nasdaq index--already in a bear market, down 31% from its March 10 record closing high--is flashing signs that it’s headed toward an even lengthier and more painful decline, some experts say.
“People are buying the dips in technology, but I don’t think it’s enough to take us higher,” said Susan Stern, a senior technical analyst at Salomon Smith Barney in New York. “It looks like stocks want to break [down] further. I don’t see any sign of stabilization quite yet.”
Technical analysts study the market’s “internals,” including stocks’ price and volume patterns on charts, to glean insight as to where the market may be headed.
To many such analysts, the tech sector, as represented by Nasdaq, is beset by several disquieting forces: anxiety-ridden buying, followed by sometimes venomous selling, of leading stocks; short-lived rebounds; and excessive investor optimism despite the losses incurred so far.
Of those factors, the most worrisome may be that investors remain far too sanguine about the outlook for stocks, market technicians say.
Certainly, individual investors’ faith in stocks, and their willingness to buy when share prices fall, have helped sustain the bull market over the last decade.
But in the paradoxical ways of the stock market, that bullishness also can be problematic. Simply put, bear markets usually end only when sentiment is at its most bearish. At that point, the bulk of sellers have been flushed out of the market, and there’s plenty of cash poised on the sidelines to be used to again bid up stock prices.
As measured by various investor-sentiment surveys, bearishness rose when Nasdaq sank almost 10% on April 14, and many investors spent the weekend fretting over their losses.
But the anxiety was softened when Nasdaq roared higher the following Monday and Tuesday.
A survey by the American Assn. of Individual Investors last week showed that more than two-thirds of small investors remain bullish, said Richard Dickson, technical analyst at BB&T; Capital Markets in Winston-Salem, N.C.
Likewise, the Investors Intelligence newsletter’s weekly survey of independent investment newsletter writers nationwide shows the bulls still firmly in the majority, at nearly 55%.
To wring out such high optimism, the market either must fall sharply, undergo a drawn-out decline, or both, experts say.
In Wall Street parlance, investors either must be “scared out” or “worn out.”
“It takes time for human beings to make that shift from the overexuberance of buying every dip, to the opposite feeling of they just don’t want to own stocks anymore,” said Paul Desmond, president of investment newsletter publisher Lowry’s Reports.
Despite Nasdaq’s steep drop since mid-March, bullish sentiment was on ample display Monday. In the final 30 minutes of trading, the index regained 137 points, cutting an 8.2% plunge to a 4.4% decline.
Nasdaq has staged a few such rallies in the last six weeks. But to Dickson, they’ve been typical bear-market rallies--usually occurring on decreased trading volume.
Rallies within bear markets often are quick and powerful. After a severe downdraft, investors often stampede into stocks in the hope of buying at a low point, thereby giving the impression that a downturn is at or near the end.
But after reclaiming one-third to two-thirds of the territory given up in the prior decline, the rallies typically peter out quickly and set the stage for another leg down.
In the last few weeks, many investors have huddled in the perceived safety of the biggest tech stocks, such as Sun Microsystems Inc. and Oracle Corp., believing they’ll provide relative calm from the storm that has ravaged Nasdaq. And indeed, those shares have fallen far less than the average Nasdaq stock.
But that trend, too, is typical while a bear market is ongoing, Dickson said. Eventually, the strongest stocks also will give way as investors bail out of the market altogether.
“People are piling into those stocks as if they’re a lifeboat, but it’s a lifeboat with a hole in the bottom,” Dickson argues.
Also troubling to market technicians, the Nasdaq index on Monday again closed below its 200-day moving average. It had initially fallen below that moving-average line in the April 14 plunge--which was the first close below the line since October 1998.
An index’s moving average, which shows the general trend in the index over a specific period, is often considered a key “support” level. Falling below it suggests that big institutional investors aren’t stepping up to buy stocks at a critical moment.
Like other technicians, John Bollinger, president of EquityTrader.com, thinks the market may have another leg down. But he doubts stocks will fall much further from here.
To Bollinger, Nasdaq appears to be tracing a “W,” or double-bottom, formation. A double-bottom occurs when the market drops sharply twice--with a brief rebound in between--in what resembles a “W” on a stock chart.
After the second downleg of the W, the recovery is sustained.
According to Bollinger, the left side of the W culminated with a sell-off the morning of April 17, when Nasdaq traded as low as 3,227 before rocketing to close at 3,539.
Nasdaq then rebounded last week, forming the middle of the W, Bollinger said.
The second downleg of the W could come in the next several days, he said.
In many W-patterns with stocks or indexes, the second downleg often extends below where the first downleg bottomed, before a true recovery finally begins.
That may be because investors who held on through the initial downleg panic when stocks fall again, and take the stock or index to a lower low.
“I’d like to see it get really bearish on the second leg down,” Bollinger said.
A W-pattern occurred in Nasdaq in late 1998, when the market was battered by Russia’s economic collapse, Bollinger points out. The second leg of the 1998 decline occurred on Oct. 8, when Nasdaq tumbled hard on enormous volume, thus knocking out all but the most committed investors.
However, if such a scenario plays out this year, Bollinger doubts Nasdaq would launch into an extended rally as it did in late 1998.
Instead, he believes Nasdaq could move sideways for a while. He reasons that the current bear market has lasted for a relatively short period, and needs to run longer to wear out investors who haven’t already been scared out.
To date, the Nasdaq bear market has lasted only 31 trading days. That compares with 65 days for the index’s slump in 1990, 68 days in 1994 and 57 days in 1998.
However, Bollinger freely acknowledges that this time may be different. Indeed, few analysts on Wall Street expected Nasdaq to be hit as hard as it has been thus far.
Instead of trying to guess the bottom for tech stocks, Bollinger suggests that investors should look for clear signs that the market has launched into an up trend before jumping in with both feet.
One of the best signs is when stocks rally forcefully, and on increasing trading volume.
“This is not the environment to be forecasting,” Bollinger said. “This is an environment to be paying attention to what’s actually going on in the markets. If you listen to the message of the markets, they will tell you what to do.”
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Times staff writer Walter Hamilton can be reached at walter.hamilton@latimes.com.
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Software Giant Falls Again . . .
Worries about Microsoft’s future drove its shares down $12.31 to $66.63 on Monday, the lowest closing price since Dec. 15, 1998. Monthly closes and latest on Nasdaq:
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Monday: $66.63, down $12.31
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. . . Dragging Other Techs Down
Another broad sell-off in tech shares on Monday added to losses the stocks have racked up during the last four to six weeks. Declines in key industry indexes from their 2000 peaks through Thursday, and on Monday alone:
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Decline from Monday Tech sector stock index ’00 peak to Thurs. change Internet (Interactive Week) -29.3 -5.7 Software (Goldman Sachs) -33.0 -5.6 Biotech (Amex) -46.1 -4.8 Wireless (Barclays) -23.3 -4.7 Semiconductor (Phila.) -23.1 -3.0 Networking (Amex) -19.8 -3.0 Computer hardware (Amex) -17.1 -2.8 Telecom (Amex) -12.0 -1.5 Computer svcs. (Goldman Sachs) -11.5 -0.9 Nasdaq composite -27.8 -4.4
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Sources: Times research, Bloomberg News
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Nasdaq’s Bear Market: More to Come?
The tech-stock-dominated Nasdaq composite index slumped again on Monday, falling 4.4% to
3,482.48. The index now is 31% below its record closing high, reached March 10. Many
“technical” market analysts are concerned that the two major snapbacks in the index since early April have quickly given way to renewed heavy selling. Moreover, the index now has fallen below its 200-day moving average. Breaking through that line can signal more selling ahead.
Nasdaq’s trend since Oct. 1:
Monday close: 3,482.48
Source: Bloomberg News
