Latest Surge in Nasdaq Fuels Talk of a ‘Melt-Up’
The bull run in smaller stocks is becoming a stampede, fanning the idea that the Nasdaq market may be headed for even more dramatic gains.
Investors poured into many smaller shares on Tuesday--in particular, technology issues--propelling the broad market sharply higher in the heaviest Nasdaq trading ever.
The Russell 2,000 index of smaller stocks rocketed 20.03 points, or 3.6%, to a record 577.71. The Nasdaq composite index, which is dominated by big stocks but also includes thousands of smaller names, soared 118.84 points, or 2.6%, to a record 4,696.69.
The buying frenzy even drove the beleaguered Dow Jones industrial average up 89.66 points, or 0.9%, to 10,128.31.
But the bull market of 2000 remains very much a Nasdaq affair, at the expense of many blue chips.
Indeed, some analysts are talking about the potential for a Nasdaq “melt-up”: With the index up 15.4% this year, and demand still robust--as Tuesday’s action demonstrated--some experts say an avalanche of cash could roll into Nasdaq shares in coming months as investors’ fear of buying at these heights is overwhelmed by their fear of missing the boat.
“This is a classic melt-up,” said Charles Pradilla, chief investment strategist at SG Cowen in New York. “This is the behavior when an area gets red hot.”
And although the technology-stock rally that began last October was initially led by the biggest Nasdaq tech stocks, investors now are most ravenous for less-well-known issues.
Big gainers Tuesday included chip maker Rambus, up $60.63 to $301.63; biotech firm Medarex, up $41.88 to $162.50; and broadband telecom firm Efficient Networks, up $39.25 to $161.25.
The action in those stocks is a dramatic turnaround from recent years. “It was 12 months ago when everybody said, ‘Small-cap stocks are dead and they’re never coming back,’ ” noted Brian Belski, chief investment strategist at George K. Baum & Co. in Kansas City, Mo.
Instead, the Russell index now is up 14.5% year-to-date. The Standard & Poor’s index of 600 smaller stocks, which soared 3.2% on Tuesday, is up 9.8% for the year.
By contrast, the blue-chip S&P; 500 index is down 7% this year, after adding 1.4% on Tuesday.
Ironically, Nasdaq’s biggest stock--Microsoft--was a loser on Tuesday, falling $2.19 to $89.38, its lowest level since mid-November.
Pradilla believes many institutional investors now are dumping larger stocks, even Microsoft, that aren’t moving, and shoveling that money into smaller growth stocks, on the expectation that those companies will fare better in an economy that may slow because of higher interest rates.
A few years ago, investors “sold Philip Morris to buy America Online. Now, they’re selling Microsoft to buy JDS Uniphase and Ariba,” Pradilla said, mentioning two hot tech growth stocks.
The action in Nasdaq overall drove trading volume Tuesday to a record 2.06 billion shares. “The volume confirms the strength” of the market, Belski said, noting that high volume on big up days in the market is a classic bullish sign of more to come.
Winners topped losers by 26 to 16 on Nasdaq, and by about 3 to 2 on the New York Stock Exchange.
Like many analysts, Belski believes Nasdaq shares are certain to pull back, perhaps soon. “Within Nasdaq [this year], you could see several 8%-10% corrections,” he said.
But as with the pullbacks that occurred in January, he expects buyers to quickly return--a function of the shift in investors’ mentality to a focus on the “new economy” stocks at the expense of the “old economy” Dow stocks.
Belski expects the Nasdaq composite index to hit 5,000 to 5,200 fairly shortly, have a 10% correction, and then rise again to the mid-5,000s by the end of the second quarter. By year-end he expects the index to be flirting with 6,000.
But many analysts warn that the grave danger in a melt-up is that it could be followed by an equally violent move to the downside, at some point. “I see a melt-up and a burnout, actually,” said Christine Callies, strategist at Credit Suisse First Boston in New York.
Among Tuesday’s highlights:
* Chip stocks were the day’s tech-sector leaders, after investment banks Salomon Smith Barney and Chase H&Q; issued wide-ranging recommendations on the sector. Xilinx soared $9.50 to $79.75, Micron Technology leaped $17.94 to $96, LSI Logic gained $6.69 to $64 and Motorola, which set a three-for-one stock split, surged $13.50 to $172.
* AT&T; led blue chips higher, up $4.38 to $49.38.
* Other stock sectors gaining included retailers and energy companies. The latter rose as oil prices continued to advance, up 30 cents to $30.43 a barrel in New York.
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Market Roundup, C10
To the Moon?
The soaring Nasdaq composite index could be in the midst of a “melt-up” as desperate investors pile into tech stocks, some analysts say. Monthly closes: Tuesday: 4,696.69
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Source: Bloomberg News
