Shake It Up: Nasdaq 100 Gets Revised

Ch-Ch-Ch-Changes

SAN FRANCISCO -- Friday evening, those hard-working folks at the Nasdaq-Amex Market Group announced the annual revisions to the Nasdaq 100, the index which tracks the Nasdaq's 100 biggest nonfinancial constituents (see table).

Nasdaq 100 Revisions
In	Out
MedImmune (MEDI)	Andrew (ANDW)
EchoStar Communications (DISH)	CBRL Group (CBRL)
Metromedia Fiber Network (MFNX)	Cambridge Technology Partners (CATP)
PMC-Sierra (PMCS)	Autodesk (ADSK)
Adelphia Communications (ADLAC)	Electronics for Imaging (EFII)
i2 Technologies (ITWO)	Fastenal (FAST)
BroadVision (BVSN)	First Health Group (FHCC)
Network Appliance (NTAP)	Lincare Holdings (LNCR)
Legato Systems (LGTO)	Micron Electronics (MUEI)
NEXTLINK Communications (NXLK)	Reuters Group (RTRSY)
SDL (SDLI)	Rexall Sundown (RXSD)
Applied Micro Circuits (AMCC)	Ross Stores (ROST)
RF Micro Devices (RFMD)	Stewart Enterprises (STEI)
Network Solutions (NSOL)	Tech Data (TECD)
QLogic (QLGC)	Worthington Industries (WTHG)
Source: Nasdaq-Amex Market Group

But size alone doesn't get you into the index. In addition to market cap, the criteria for inclusion include something Nasdaq calls "seasoning," which has nothing to do with paprika (the happiest spice in the world). Rather, a stock must have been listed on the Nasdaq for at least two years (or one year if it's among the top 25 market caps) to merit being added to the NDX.

Thus, recent IPOs such as Sycamore Networks (SCMR) did not make the cut, despite sporting a market-cap of around $18.7 billion. Other names which also met the market-cap criteria, according to a recent report by Merrill Lynch, but apparently lacked sufficient caraway and/or coriander to be added to the index, include DoubleClick (DCLK), Exodus Communications (EXDS), Broadcom (BRCM), VeriSign (VRSN) and Inktomi (INKT).

This strikes me as a bit of reverse ageism by Nasdaq, but I guess youngsters like Sycamore need something to strive for.

While neither Morningstar nor Lipper had information on Nasdaq 100 funds, there is apparently some sort of "NDX effect." The gains may not match the blockbuster move Yahoo! (YHOO) produced when it was added to the S&P 500 last Wednesday, but the nine names added to the Nasdaq 100 last year outperformed those being deleted by 5.6% during the week of triple-witching expiration, according to Merrill Lynch. The December expiration of index options and futures and stock options occurs this Friday.

Given the growing popularity of the Nasdaq 100 Trust (QQQ), which has grown in assets to $4.65 billion since its inception in March, it's likely this year's adds will generate even greater interest, predicted Diane Garnick, equity derivatives strategist at Merrill.

Today, the names being added rose an average of 3.3%, led by BroadVision (BVSN), which gained 21%. Only three of the 15 names retreated, most notably i2 Technologies (ITWO), down 8.9%.

Speaking of the growing popularity of the QQQs, Merrill Lynch's equity derivatives team noted that trading in the Nasdaq 100 trust outpaced those of S&P 500 Depositary Receipts (SPY) in November by $26.5 billion to $17.4 billion.

The rising prominence of the Nasdaq 100 trust could be one reason S&P added Yahoo! to the hallowed 500 index, a cynical observer (who, me?) might say, and why it may be more apt to consider adding tech names in the future. (Barron's Rhonda Brammer alluded to as much this weekend but was either lacking the data or the chutzpah -- or both -- to come right out and say it. Or maybe she's worried the same finger of skepticism could be pointed at her employer, which recently tried -- with mixed results -- to "soup up" the Dow Jones Industrial Average with Intel (INTC) and Microsoft (MSFT).)

Elliott Shurgin, vice president of index services at Standard & Poor's, was unavailable when I called today, but I'm 99.99% sure he would have denied that view.

Meanwhile, I'm sure the fact Yahoo! is popular with investors was certainly secondary to the fact Internet stocks represent a growing portion of the economy. Yet if (as if?) their popularity continues, tech stocks will only grow to represent a bigger piece of the economic pie, thus forcing S&P (and others) to adjust accordingly.

And the vicious (some would say "virtuous") cycle continues, evident again in trading today.

Accountability, Cont.

Attached below is the latest look at how pundits and prognosticators featured in this column have fared. This time around, I've added my subjective thoughts in the table, because pure quantitative analysis (a.k.a. "numbers") is apparently not enough for some readers.

Fortunately, I was able to catch up with few players featured in this report card. As was the case back on Oct. 21, Alan Hoffman, senior portfolio manager at Value Line, expressed confidence in Tyco (TYC).

"I still think it's selling off for bogus reasons," Hoffman said, even while acknowledging the company may use an "aggressive posture" in its accounting.

Value Line has maintained its long position in Tyco, he said, but has not added to its exposure during the stock's recent weakness.

Hoffman's view is similar to that expressed by many sell-side analysts last week -- a view that was somewhat vindicated today as Tyco shares rose 2.7% after the company released its annual report, which received the approval of three accounting firms.

Seperately, Charles Payne, president of Wall Street Strategies, said he is still recommending CNet (CNET), but has since "traded out of" Cybershop (CYSP).

Some of the names Payne has recommended more recently in his email service for "active" investors include BroadVision, Sandisk (SNDK), NetScout Systems (NTCT) and Proxicom (PRXM).

Finally, Paul Lieberman, an analyst in the equity derivatives research group at Lehman Brothers, was unavailable today. But you can see how the tax-loss selling candidates he recommended on Oct. 25 have performed here. And remember, the analyst recommended selling those names in anticipation of more selling by investors looking to snare tax losses to offset their risers. So the gainers in the table are an anathema to anyone who followed his advice.

Accountability Report Card
Date	Source	Recommendation/forecast	Performance*	TaskMaster says...
Oct. 21	Alan Hoffman, senior portfolio manager at Value Line	"For someone who has no exposure, I think it's an excellent opportunity," he said regarding Tyco International(TYC).	TYC: -31%	P.U.
Oct. 28	Scott Bleier, chief investment strategist at Prime Charter	"The correction is over. There's a good chance we'll retest the old highs."	DJIA: 5.7 SPX: 5.6 COMP: 25.9	On the money.
Nov. 4	Roxane Googin, editor of the newsletter High Tech Observer	Sycamore (SCMR) may be "undervalued." Also, "get rid of all your Intel (INTC) and buy JDS Uniphase (JDSU).	SCMR: 2.2 INTC: -11.4 JDSU: 27.3	Smart lady.
Nov. 8	Joseph Battipaglia, chairman of investment policy at Gruntal	The Federal Reserve will not raise rates at its Nov. 16 meeting. Unwaveringly bullish on equities.	The Fed DID hike but since then, the DJIA is up 4.7 SPX: 2.9 COMP: 15.1	Joe B. is a better stock forecaster than Fed watcher.
Nov. 10	Charles Payne, president of Wall Street Strategies	Buy: Cybershop (CYSP) and CNet (CNET)	CYSP: -6.5 CNET: 26.9	Not a bad "average."
Nov. 23	William Erman, founder of Ermanometry Research	The S&P 500's intraday high of 1425.31 on Nov. 18 "a very important top that could hold for the rest of the year."	The S&P is up 0.9% since Nov. 23 and set a new intraday high of 1447.42 on Dec. 3. Yet the index has traded below its Nov. 18 intraday high for most of the past month.	Bears watching.
*% moves through close on Dec. 10. Source: Baseline.

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