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Drying Stimulus Tap Is Sore Spot for Tech Stocks

NEW YORK ( TheStreet) -- The drying stimulus tap rather than stretched valuations has been the trigger for recent selling in tech and biotech shares, some managers argue, claiming this makes another tech sector crash unlikely.

Stocks facing pressure in the current market rout are also those with blue-sky stories, or companies facing a "long duration" before earnings justify their stock prices. Many of these rode market momentum last year and are being ditched in favor of value stories.

ING U.S. Investment Management noted clear downside for many stocks after confirmation from Federal Reserve minutes this week that rates will likely rise around mid-2015. "A tiny increase in the expectation of a rate rise a year and a half in the future is having an enormous impact on these long duration stocks," chief market strategist Douglas Cote told clients.

The investment manager pointed to sectors such as biotech, Internet retail, semiconductor equipment and health care technology stocks as the most vulnerable.

Must Read: Markets Jump on Fed Minutes; Policy to Remain Loose for Some Time

Social media and biotech companies were displaying their volatility on Friday. Twitter (TWTR - Get Report) was more than 2% lower in afternoon trade after shedding an eye-watering 14% in the past fortnight, while Facebook (FB - Get Report) was gaining 0.34% after shedding more than 5% on Thursday and jumping 7.25% on Wednesday. Biotech company Gilead Sciences (GILD) was popping 3.94% after diving 7.32% on Thursday.

But several managers said there is little evidence of stretched valuations in the tech sector, arguing against comparisons to the tech
bubble of 2000.

Capital Economics' chief markets economist,John Higgins, noted that in March 2000 -- the month in which technology shares peaked -- the price/estimated operating earnings ratio of the S&P 500 biotech index at 46 was more than twice its current level of about 20. The valuation of the IT sector was nearly four times as high.

"The key reasons we expect equities to struggle are dwindling fuel from the Fed and cyclical pressure on profit margins, rather than stretched valuations," Higgins said. He is forecasting a year-end level of 1,900 for the S&P, close to its current level. Others dismiss conventional financial metrics for sectors such as social media, pointing to the fickle drivers of earnings in the industry.

Many traders are pessimistic on the near-term outlook. "This (market move downward) needs to be recaptured sooner rather than later and has the potential to last three to five days," Greywolf Execution chief market strategist Mark Newton said. "Fewer indices are hitting new high territory globally and the price structure (of the U.S. market) is getting worse and worse and worse."

-- By Jane Searle in New York

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