Midday Musings: It May Be Too Late on Tech

The Nasdaq Composite was softening at midday but its recent relative strength has (finally) caught the attention of pundits and market watchers.

"The central debate in the market right now is whether it is too early to move back into tech," The Wall Street Journal reported this morning.

Actually, I contend that the central debate is whether it is too late to move back into tech, given the Comp's more than 35% gain since its September lows and more recent 12.4% gain since Feb. 21.

It is too late for tech, according to Thomas McManus, equity portfolio strategist at Banc of America Securities, who today lowered his recommended equity allocation to 50% from 55%, raising bonds to 45% from 40% and leaving cash at 5%. The strategist also lowered his rolling 12-month target for the Comp to 2250 from 2350 while maintaining rolling 12-month targets of 1200 for the S&P 500 and 10,400 for the Dow Jones Industrial Average. (Yes, he expects the Dow to be lower 12 months hence.)

"Valuations are full and require an investor to 'buy into' the prospect of a robust recovery in 2002, which is not likely in our view," McManus wrote. "Economic recovery beneficiaries -- cyclicals and technology stocks -- have the most risk in a 'stumbling recovery' scenario."

The strategist maintains a neutral weighting on the telecommunication sector and underweight recommendations on tech, consumer discretionary and industrials. He's overweight consumer staples, health care and financials, and neutral on the basic materials sector.

McManus has been among the more successful gurus we follow because of his pessimism on tech and his generally defensive approach, a view he's taken since shortly before the market's peak two years ago.

That caution may again prove prudent in the long term, but it means McManus largely has been on the wrong side of the recent short-term outperformance of tech and cyclical names.

Michael Paulenoff, founder of 2MStrategies.com, conversely, has been quite optimistic on tech of late. On Feb. 21 he predicted the "end of the entire corrective process from the December-January highs" was at hand. Then on Feb. 27 he was among a handful of market watchers who suggested tech was ripe for rediscovery, a theme I have repeatedly revisited since.

In discussions Friday afternoon and Monday morning, Paulenoff suggested the Comp was "near a significant near-term peak" at around 1930 and "would be getting out of tech right here," a recommendation that jibes with what RealMoney.com's Gary B. Smith wrote.

But while expecting a "meaningful bout of profit-taking" in the short term, Paulenoff's intermediate-term view is that the Comp's advance that began in late February "has a considerable distance to climb."

Following a near-term pullback into the 1820 to 1850 range -- a 40% to 50% retracement of the rally from Feb. 21 through Friday -- the technician is expecting "another significant up-leg that propels the Comp to test the January high at 2098," reached intraday on Jan. 9.

If 2098 is hurdled on a closing basis, Paulenoff then foresees a "minimum upside target" of 2280 for the Comp.

"The power of the next up-leg will tell us if we are dealing merely with the conclusion of a large, potent, countertrend advance within an overall Nasdaq bear market, or a new up-leg in a bull move that started in September," he continued.

Currently, Paulenoff favors the former, believing that when the countertrend rally is complete it will "reverse to the downside with a vengeance sometime later this year."

Notably, such a scenario jibes with McManus' longer-term skepticism.

P.S.

Another view on the Comp's recent rally comes from James Rohrbach of Investment Models in Orlando, Fla.

At the close of trading on March 4 (last Monday that is), Rohrbach issued a "buy" recommendation on the Nasdaq, reversing a sell recommendation issued on Jan. 22. From its close on Jan. 22 through its close on March 4, the Comp fell 1.2%.

Rohrbach maintains the "buy" recommendation on the New York Stock Exchange issued on Oct. 10. Since its close on Oct. 10, the NYSE Composite Index was up 7.5% heading into today's session, while the S&P 500 was up 7.7% and the Dow Industrials by 14.4%.

Before you ask: It's taken me a week to report on Rohrbach's Nasdaq buy call because he's required that I delay reporting on his calls for at least two days in deference to his paying subscribers.

This serves as a reminder that subscribership has its advantages if you want to ensure you're getting the latest and complete update from "gurus."