Net Bellwethers Beaten Into Bargains

I know hindsight is 20/20, but the bellwether Internet stocks warned that a Nasdaq bust could be coming. Since January, while the Nasdaq has traded sideways to up, Internet stocks (and many other tech issues) started to drift lower.

On Thursday, three of the four bellwethers I have been tracking tested 52-week lows: Amazon.com (AMZN - commentary - Cramer's Take), eBay (EBAY - commentary - Cramer's Take) and Yahoo! (YHOO - commentary - Cramer's Take) are all down over 30% from their December/January peaks. While these stocks swooned, Google (GOOG - commentary - Cramer's Take) came close to testing its 200-day simple moving average of $369.22, 22% below its peak on Jan. 11.

The Nasdaq tested 2300 on Jan. 9, at which point my mantra became "Nasdaq 2300, then bust." The Nasdaq traded between 2230 and 2332 into the end of March, as the Internet stocks -- and many other tech names -- began to tank. I was surprised that the Nasdaq traded higher into April, but the strength of the four-letter transportation stocks was propping up the tech-heavy index.

The Nasdaq formed a double top at 2375 on April 7 and April 20, broke below 2300 on May 11 following the FOMC meeting, and in the six trading days since, through Thursday, it has fallen 5.2%. Essentially, it has taken only six days to reverse a four-month sideways-to-up pattern -- this could be a precursor to a bust, which I define as a drop of at least 20%.

Investors should consider adding to holdings in three of the four Internet bellwethers; they have hit my downside targets and are significantly undervalued.

Amazon.com held above my quarterly value level of $31.64, which is a level at which investors should add to positions. eBay is 36.2% undervalued, making it cheap enough for investors to add to positions.

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Richard Suttmeier is president of Global Market Consultants, Ltd., and chief market strategist for Joseph Stevens & co., a full service brokerage firm located in lower Manhattan. Early in his career, Suttmeier became the first U.S. Treasury Bond Trader at Bache. He later began the government bond division at L. F. Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the technicals of the U.S. capital markets. He also has been U.S. Treasury Strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University.