Tuesday, February 01, 2000

Why are you running away, asked the DOW of the NASDAQ?

A huge divergence has developed between the movement of the DOW and NASDAQ. The Dow is well below its 200 day moving average, and had broken below its psychological 10,000 level, while the NASDAQ is well above its 200 day moving average, and continues to make all time highs. After years of being told to invest in index funds because the majority of mutual funds couldn't outperform the index, in turn sending the indexes to record valuations, investors have started pulling their money out of index funds, and rolling the dice on tech stocks, in turn sending the NASDAQ on a express train to the moon.
When this amazing ride will end, is anyones guess. If anyone tells you that they have it figured out, they're lying. The run has stupefied the best of investor, as well as any financial or economic model. The market doesn't care about the quality of the company, just that they're involved in one of the hot sectors. What we've entered into is a full blown momentum market. The way a momentum market works is like this: Stocks move because someone's buying them, and someone else is willing to buy the stock at a higher price, and then at an even higher price, and then sell it at an even higher price. As you see this can go on indefinitely, until there's no left to buy, and then CRASH!!!!
Once the party ends, the gap between the indexes will close. People will flock out of these ridiculously valued tech stocks, and back into value. At which time we will see a tech correction like no other. But the bull market will continue, as investor rush back into the value stocks. There is too much money out there floating around for the bull to stop charging.
In the meantime, enjoy the day trading. But don't, and I can't stress this enough, don't buy into these issues for the long-term. A company like JDSU, which is selling at about 1/4 the value of CSCO, isn't worth $100 billion, with sales of less then $1 billion. Yes, they have the technology that's in hot demand, but they're not the only ones. In fact CSCO, LU, and some other big players are starting to get into their business. Remember, it took CSCO, with $16 billion in sales, 10 years to earn its valuation, and that was after years of proving it can consistent revenue and earnings growth. It has taken JDSU 1 year, with barely a history. At this pace, JDSU will surpass CSCO's market cap by the end of the year. I think we can all agree, that would be irrational. Don't get me wrong, JDSU will be around for a long time, but your long term investments will be served better elsewhere. In the meantime enjoy trading JDSU, it can make you a lot of money if timed correctly.
The NASDAQ should continue to march right on in March, while the remaining 1999 IRA contributions and bonuses pour into it. Once that liquidity dries up, we will get the long awaited correction in the NASDAQ, but look for the DOW to rise, as investors temporarily look for a place to park their cash, until the NASDAQ express is back up and running.
Post a Comment