Put the Selloff in Perspective

It's been quite the selloff to kick off the new year. Technically, the Nasdaq has been down five days in a row. With a little more digging, though, the Nazz hasn't done anything positive for eight straight days, as the last four trading days of 2004 were essentially flat.

Step back yet a little further and you'll see the Nazz hasn't really had its rally legs underneath it since the end of November. Finally, if you look at the Nasdaq 100 Trust (QQQQ - commentary - Cramer's Take) rather than the Nazz, it's clear that this market hasn't been in rally mode since late November, when the QQQQ hit a multiyear high and has stumbled lower since.

Of course, to really get some perspective, you need to look at the action since we exited the summer "soft patch" that roiled so many companies' fundamentals and their stocks. The Nazz has rocked the shorts, jazzed the longs and left many pundits who thought the bull phase was finally dead, as it ran 25% in about three-and-a-half months.

Certainly, as we're seeing from a lot of tech companies such as DoubleClick (DCLK - commentary - Cramer's Take) and SimpleTech (STEC - commentary - Cramer's Take) in just the last 16 hours, pre-announcing to the upside, the fundamentals now are much better than they were during those soft-patch summer days when almost nobody but nobody reported strong numbers. (That's not to look past the warnings from companies like UTStarcom (UTSI - commentary - Cramer's Take) and others recently; my point is simply that there were almost nothing but warnings from tech companies in August.)

So business is fine for now and stocks reflect that. The fundamental outlook for 2005 appears to be strong for most tech stocks again. The biggest concern in my mind is the semiconductor sector. Rev Shark has noted repeatedly that the semis have not been acting well in a long time. While certainly there will be more semi companies than this summer with strong fundamentals, such as STEC and LSI Logic (LSI - commentary - Cramer's Take) already, and probably Intel (INTC - commentary - Cramer's Take) and AMD (AMD - commentary - Cramer's Take) in upcoming reports, there are still a lot of glut issues in the sector that will roil earnings and stocks. One will have to do homework to figure out which companies will be strong and which will be weak, as the overall sector is likely to have neither the boom times of 2003 nor the bust times of last summer.

Most other sectors, from software to storage to telecom equipment, don't have such glut issues and, given a decent to strong broader economy, will have a good 2005 -- as we'll be seeing they did in the fourth quarter of 2004, too, when the earnings season kicks off next week.

Today we'll have to see if the market can finally do something besides open strong and close weak for the first time this year.

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Please note that due to factors including low market capitalization and/or insufficient public float, we consider SimpleTech to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.

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At time of publication, the firm in which Willard is a partner was long AMD calls, Intel calls and UTStarcom calls and short AMD and UTStarcom, although positions can change at any time and without notice.

Cody Willard is a partner in a buy-side firm and a contributor to TheStreet.com's RealMoney. He also produces a premium product for TheStreet.com called The Telecom Connection and is the founder of Teleconomics.com. The firm in which Willard is a partner may, from time to time, have long or short positions in, or buy or sell the securities, or derivatives thereof, of companies mentioned in his columns. None of the information in this column constitutes, or is intended to constitute, a recommendation by Willard of any particular security or trading strategy or a determination by Willard that any security or trading strategy is suitable for any specific person. Willard appreciates your feedback and invites you to send it to [e-mail].