Turning on Tech: Some Gurus Cast a Bearish Glance at Tech Stocks

GuruVision: A Day Late, Several Dollars Short

SAN FRANCISCO -- Predictably, last week's year-to-date-gain-erasing downturn generated concern bordering on panic in the weekend press and among some market watchers. Just as predictably, today's action belied such concerns as the Dow Jones Industrial Average rose 1.5%, the S&P 500 gained 1.2% and the Nasdaq Composite rose 0.8%.

Previous GuruVisions

Perfect Timing? Yes, You Can Time This Market, Says Guru

Market Bullheadedly Ignores Missed Earnings, Salivates for Rate Cut

This Rosencrans Has Thorns: Market Blooms, but Strategist Offers Warning

And the Winner Is...

Certainly it was a rough session for shareholders of Emulex (EMLX Quote), down a shocking 47.9% after the company warned, and those of sympathy victims QLogic (QLGC Quote), Brocade (BRCD Quote), Juniper Networks (JNPR Quote) and EMC (EMC Quote).

But those fiber-optics equipment and storage makers were the exception, not the rule, as advancing stocks bested declining issues 19 to 11 in NYSE trading and by 20 to 17 in over-the-counter action. New 52-week highs bested new lows 198 to 15 in Big Board trading and by 100 to 53 in Nasdaq action.

Stock were buoyed, no doubt, by anticipation that Federal Reserve Chairman Alan Greenspan will dispense more hints about future rate cuts at his Humphrey-Hawkins testimony to Congress tomorrow. Given Greenspan's recent public pronouncements, that's probably a pretty safe bet. Reflecting such expectations, the Dow was supported by a cross section of its components, notably Johnson & Johnson (JNJ Quote), General Electric (GE Quote), Boeing (BA Quote), Wal-Mart (WMT Quote) and IBM (IBM Quote).

The Comp, meanwhile, was aided by strength in chip stocks as well as biotech and genomic issues, which rallied amid the publicity surrounding Celera Genomics (CRA Quote). The American Stock Exchange Biotechnology Index rose 4.4%.

So if today's advance was somewhat predictable, was last week's decline? Well, one who did forecast it was Don Hays of Hays Advisory Group in Nashville, Tenn. As I reported midweek, last Monday Hays forecast the Comp would "tread water for a couple of more days, and then start a more serious decline that will bring it back around 2500."

That is pretty much what occurred, although the Comp -- of course -- tumbled some 30 points below 2500 and Hays suggested the decline would last four to five weeks (vs. days).

Today, the strategist forecast that the index will "get a little relief from last week's weakness" and likely hold above support at 2420. But Hays does not foresee a sustainable rally emerging near term.

Elsewhere, James Rohrbach of Investment Models in Orlando, Fla., announced to clients of his newsletter late Friday that his Nasdaq timing model had turned to a sell signal, reversing the buy indication it flashed on Jan. 10.

Obviously (and in contrast to Hays), Rohrbach's model did not spare its followers last week's 7% decline. But as recently featured here, Rohrbach's timing models are not designed to pinpoint exact market tops or bottoms, but to identify trend changes and recommend appropriate action. Thus, by definition, his Nasdaq model is suggesting there is more weakness to come for the Comp.

"The Nasdaq model has issued a sell signal and I would not ignore it," the newsletter writer commented Friday. "It's time to step aside and let [the Comp] do what it wants to do on the downside. We will get back in when it starts up again, but after last year I wouldn't want to take my chances on the long side right now."

Rohrbach's NYSE model maintained the buy signal originally triggered Dec. 27, 2000.

Meanwhile, caution about tech stocks was also a focus among some of GuruVision's "regular" contributors this week.

Greg Smith, chief investment strategist at Prudential Securities, and Edward Yardeni, chief investment strategist at Deutsche Bank Alex. Brown, each noted tech stocks remain richly valued vs. historic norms.

At the end of last week, the S&P 500's forward price-to-earnings ratio was 22 times vs. 57 times for the Nasdaq 100, Smith observed. In 1996, the S&P's forward P/E was 16 times vs. the low 20s for the NDX.

"The Nasdaq should trade at a premium multiple due to its higher growth, but it should have a multiple which reflects that every once in a while, there will be a cycle," he wrote. The valuation discrepancies "tend to contract during a period when the cyclical concerns are the highest -- where we are now."

Separately, Yardeni made the similar valuation point and wrote, "I would use the opportunity afforded by the rally in tech so far this year to underweight the sector, which is likely to remain earnings-challenged through the second quarter, at least."

Yardeni forecast the Nasdaq will be trading as low as 2400 by the end of March and only at around 3000 at year-end.

Heck, even Credit Suisse First Boston's Thomas Galvin, who's become the poster child for growth-stock investing, wrote that he "expect[s] health care and energy to win the February performance race."

Galvin's recommendations include Johnson & Johnson, Pharmacia (PHA Quote), Quest Diagnostics (DGX Quote), El Paso Energy (CPG Quote), Santa Fe International (SDC Quote) and TotalFinaElf (TOT Quote). (CSFB "may have" done underwriting for any of the aforementioned, according to the fine print in Galvin's report. More detailed, i.e., useful, information was not available.)

But lest you think every guru has "abandoned" tech, making it more attractive for contrarians, I should note Christine Callies of Merrill Lynch, Jeffrey Applegate of Lehman Brothers and Brian Belski of U.S. Bancorp Piper Jaffray (among others) each came out with pro-tech commentary Monday morning.

And the Follow

A story about decimalization in Monday's Wall Street Journal echoed a piece here last week, particularly regarding the frustrations of institutional investors and concerns about "front-running" by specialists. A major difference was the Journal's contention that decimalization has been "a boon so far" for individuals.

Tighter spreads are great in theory, but are of little practical value if orders don't get executed because of the lack of depth in the market or other factors. The "boon" comment starkly contrasted the tone of the vast majority of emails I received after last week's report.

Granted, it is very early in the process, but I intend to pursue as much concrete data as possible to refute or confirm the idea that decimals are a boon for the individual and/or a bust for institutions. Any assistance you can offer is greatly appreciated.

Meanwhile, register your thoughts on the subject here.

I think decimalization is: The greatest thing since sliced bread. The worst thing since sliced (white) bread. A boon for retail but a bust for institutions. A boon for the specialists only. Too soon to say. (For a GuruVision primer, check out this story.)