The Nasdaq Is Not the Market

SAN FRANCISCO -- Just when it looked like investors were trying to get out of tech stocks, the allure of the group's past glories dragged them right back in (again). Whether today's rally turns out to have more staying power than

Godfather III

remains to be seen. Still, today's move was better scripted.

Once as low as 2388.40, the

Nasdaq Composite Index

stormed back to close up 2.6% to 2491.41. "Bad" news, notably from

Applied Materials

(AMAT) - Get Report

and

JDS Uniphase

(JDSU)

was instead perceived to be an opportunity to buy the stocks. Applied Materials, which issued

cautious comments last night, rose 13.5%. JDSU, which

warned, gained 7.1%. JDSU benefited from indexers forced to buy its shares after the closing of its acquisition of

SDL

.

Most other big-cap tech bellwethers rallied as well, helping the

Nasdaq 100

climb 4.4% and the

Morgan Stanley High Tech 35

gain 3.6%. Buoyed by chip-equipment makers such as AMAT, and chipmakers such as

Micron

(MU) - Get Report

, the

Philadelphia Stock Exchange Semiconductor Index

rallied 7.8%.

The dark side of today's action was that there was only enough firepower to lift tech. Most other major industry groups faltered, leaving the

Dow Jones Industrial Average

down 1% and the

S&P 500

off 0.2%. Declining stocks bested advancers 17 to 13 in

New York Stock Exchange

action and by 19 to 17 in over-the-counter trading.

A session like today's would have seemed normal a year ago. Now it looks anomalous.

"Don't get mesmerized by watching the wrong thing" was the message today from Don Hays of

Hays Advisory Group

, who called the Nasdaq a "decoy index."

Hays referred to the Comp's weakness prior to today as camouflaging strength elsewhere. But the point is still germane: While many investors continue to look at the Nasdaq with wistful lament (appropriate for Valentine's Day, I guess), the

Wilshire 5000

has posted "higher highs and lower lows" in recent days, he noted. That's a high-falutin' way of saying the average stock is doing well, further evinced by net gains of new 52-week highs on the NYSE, which outpaced new lows 144 to 24 today.

The point of Hays' latest missive is that the

interlude rally call still stands. He continues to believe the current broad market advance presages the third stage of the bear market that will begin sometime in the second quarter. The vast majority of stocks -- growth and value, New and Old Economy -- will fall in concert in the third stage, he predicts.

In the meantime, Hays expects the Dow will break through 11,000 soon and he "will be surprised to see" much more downside in the Nasdaq.

I return to Hays because he has the hot hand. On

Monday, you'll recall, the strategist forecast the Nasdaq would hold support at 2420 and get some relief from last week's weakness. That appeared to have transpired today.

Like a smart basketball coach (or player), I'll keep feeding the hot hand until it turns cold.

Speaking of Hot Hands...

Thomas McManus, equity portfolio strategist at

Banc of America Securities

-- but better known worldwide as

GuruVision's "Guru of the Year" (GOTY) for 2000 -- held a conference call yesterday, providing an opportunity for an update.

The strategist noted the average year-to-date gain for the 1500 stocks in the S&P 500,

S&P MidCap 400

and

TST Recommends

S&P SmallCap 600

was 6.4% through Feb. 9. "The returns were not bad at all six weeks into the year," the strategist commented.

Additionally, "it's pretty clear" six of the 10 sectors within the S&P 500 -- energy, industrials, consumer staples, health care, financials and utilities --are "still in a strong bull market," McManus said, "even if tech stocks are pulling popular indexes down."

Information technology and telecom services remain in bear markets, while materials and consumer discretionary stocks are in flux, he said. McManus predicted the rally in materials will prove to be a "head fake," but that consumer discretionary stocks will "continue into a bull

market, although not a very strong one."

Despite those positives, McManus reiterated the cautious outlook expressed on Jan. 18, when the

GOTY awards piece was published. He maintained a defensive recommended allocation of 60% stocks, 35% bonds and 5% cash.

Reacting to

Federal Reserve

chairman

Alan Greenspan's

testimony, McManus surmised the Fed is going to return to a gradual approach.

"The 'V-bottom crowd' would like to be able to conclude the Fed will be done quickly and be very aggressive in the pursuit of easing," he said in a follow-up interview today. "But I don't see the economy falling off a cliff, and the Fed isn't going to be faked out."

McManus forecast the

fed funds rate will be at 4.75% at year-end (vs. 5.50% currently). He believes the economy will continue to decelerate but avoid recession. Thus, the Fed will be unable to be as aggressive as many pundits currently expect. That will keep equity investors off balance and returns for the averages subdued this year, he forecast, reiterating rolling 12-month targets of 1525 for the S&P and 3000 for the Nasdaq. He still believes the Comp will break 2000 sometime this year.

In yesterday's conference call, McManus reiterated many of the same concerns registered last month, including:

That consensus earning estimates and investor sentiment both remain too high.

Mutual fund inflows do not suggest a reinvigorated bull market. Most classes of equity funds saw inflows in January down about 50% vs. year-ago levels, he said. Additionally, $50 billion went into tech funds between October 1999 and March 2000, and such funds enjoyed strong inflows at the beginning of this year. Expect "disillusioned investors to express remorse by continuing to redeem" as this year progresses, McManus said.

Foreigners are becoming less enamored with U.S. stocks. After purchasing an average of $11 billion a month of U.S. stocks in recent years, Europeans bought just $7.5 billion in November as the euro rallied, he said, November is the most recent month for which the government has released such data.

The "cash mountain" on the sidelines is a "mirage." Cash was about 9% of retirement-oriented mutual funds at the end of 2000, he said, the lowest level in 10 years. "There's no indication people are defensive in asset allocation."

As with McManus' overall outlook, Banc of America's "fresh money focus list: 10 stocks to buy now," remains unchanged from mid-January. The list consists of:

ACE

(ACL)

,

Alza

(AZA)

,

Cardinal Health

(CAH) - Get Report

,

Clorox

(CLX) - Get Report

,

Constellation Energy

(CEG)

,

Fannie Mae

,

Freddie Mac

),

Kimberly-Clark

(KMB) - Get Report

,

Reliant Energy

(REI) - Get Report

and

Southern Co.

(SO) - Get Report

. (BofA has done underwriting for ACE.)

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.