What a Week: The Bad News Bulls Keep Grazing in Tech

SAN FRANCISCO -- "It's a bull! It's a bull!" Or so declared the market doctors after stocks, notably of the tech variety, delivered a second straight week of gains. Additionally, some of the earnings news this week wasn't as terrible as some feared, even if it wasn't terribly strong, either.

Only more signs of economic weakness, continued power problems in California plus more warnings and cautious comments from companies in varied industries had the potential to dampen the enthusiasm. But those developments only reconfirmed expectations that more favors will be forthcoming soon from the Federal Reserve.

For the week, the Dow Jones Industrial Average rose 0.6%, the S&P 500 rose 1.8% and the Nasdaq Composite gained 5.5%.

Market players were in a wait-and-see mode Tuesday when trading resumed after the long holiday weekend. Mainly they were waiting for a slew of earnings and to see how stocks reacted. After a relatively quiet session, the Dow rose 1.2% while the S&P and Nasdaq suffered modest declines. Banking stocks did well despite reports of more problem loans at Bank of America BAC and slowing growth at Citigroup C.

Unbeknownst to investors focused on the "major" averages, the Value Line Arithmetic Index set a record on Tuesday, culminating what some observers have dubbed a "stealth bull market" for the majority of stocks in recent months.

On the economic front, the Commerce Department reported another rise in inventories, the latest sign of corporations' struggles to hock their wares.

The earnings barrage Tuesday evening featured results from Intel INTC, which met expectations but forecast a 15% decline in first-quarter sales. But on Wednesday, investors chose to cheer the fact Intel's results weren't worse, and the stellar reports from newer tech bellwethers such as Juniper Networks JNPR and Applied Micro Circuits AMCC.

Party Like It's... Yep, 1999

Harkening back to the go-go days of yesteryear, momentum favorites raged on the upside early Wednesday, sending the Nasdaq as high as 2756.63. But some of the initial giddiness faded into the close and the index closed up "just" 2.5% at 2682.78. The S&P 500 rose 0.2% but failed to sustain its early gains while the Dow shed 0.6%, weighed down by a profit warning from 3M MMM.

Meanwhile, industrial production posted its biggest decline since June 1998, while the Consumer Price Index report proved tame. That combination left some observers salivating about the prospect for more Fed easing. Additional indications of economic slowing came from J.P. Morgan Chase JPM, which posted lower-than-expect results and General Electric GE, which reported earnings in line with expectations but warned of "significant" layoffs.

IBM IBM led the earnings barrage Wednesday evening, producing better-than-expected earnings and issuing generally positive guidance. Elsewhere, i2 Technologies ITWO demonstrated the risk of trying to game expectations for companies and individual investors alike.

Evoking its past glories, IBM rose 12% Thursday and spearheaded another surge for tech stocks in the process. Big Blue's news overshadowed less-than-stellar reports or outright disappointments from the likes of Apple Computer AAPL, AMD AMD, Extreme Networks EXTR, and Redback RBAK. The Nasdaq rose 3.2% to 2768.49, eclipsing what some observers viewed as technical resistance at 2700. Goosed largely by IBM, the Dow rose 0.9% while the S&P 500 gained 1.4%.

The Philadelphia Fed survey released Thursday was perhaps the most dramatic example of another week's worth of data showing the economy in retreat. (Friday's consumer sentiment figures from the University of Michigan confirmed the trend, although the trade deficit shrank for the second straight month.)

Thursday evening brought more news perceived to be positive from Microsoft MSFT, as well as BMC Software BMCS, Commerce One CMRC, and eBay EBAY.

Reflecting the optimistic mood heading into Friday's session, those results appeared to overshadow the slower growth outlook from Sun Microsystems SUNW.

But the early momentum quickly faded. The Comp managed to climb 0.1% to 2770.38 on Friday, but closed well off its initial high of 2841.25. The S&P 500 shed 0.4% while the Dow lost 0.9%, as an earnings warning from Home Depot HD counterbalanced additional gains by Microsoft and IBM.

Notably, declining stocks bested advancers Friday as reflected by a 0.9% decline for the Value Line Index, which saw its streak of record-setting closes snapped at three.

Don't Stop the Rain

Still, few tears were shed over Friday's dour session. Heading into the weekend, the prevailing sentiment on Wall Street was one of regret: by those lamenting gains lost by selling winners too soon, or those who didn't enter the fray quickly or substantially enough. Pundits skeptical of tech stocks at the beginning of the year were acquiescing to the group's power by week's end.

Similarly, I warned investors to be mindful of the herd, but neglected to note just how powerful a force the herd can be. Despite last year's debacle, tech stocks continue to frolic in the dreams of most investors and the group has clearly regained momentum in the early part of 2001.

The question, of course, is whether the momentum can continue.

"We think that technology outperformance is more possible, although not yet probable," Robert Robbins, chief investment strategist at Robinson Humphrey in Atlanta, wrote Friday. "It is very unlikely that technology will again show anywhere close to the overwhelming leadership that it did in the two years prior to the March 2000 high."

Robbins is far from bearish; on Dec. 21, he upgraded stocks to the highest ranking in his methodology and predicted roughly 25% gains for the S&P 500 this year. Furthermore, on Friday he raised the recommended allocation in tech stocks to 25% from 20%. But by upgrading tech to a level still slightly below its weighting in the S&P 500, the strategist acknowledged the group's upside potential while simultaneously seeking to remind investors that diversification is not a dirty word.

But for this week, as with the one prior, investors mainly had eyes for tech.