Back so soon? Yes,
4000 is here.
Just six weeks ago, Wall Street was celebrating the Nasdaq's
breaching of the 3000 barrier according to its custom -- by counting its profits. Now, the Nasdaq Composite Index, riding a 25%
lovefest, closed 69.34 higher Wednesday at 4041.45. The tech-soaked index is up more than 84% for the year, putting another milestone in the rearview mirror and adding yet another exclamation point to this yearlong, hair-raising tech-stock rally.
Along the way, the narrow rally that's been driving the Comp all year -- the one that, by all the old valuation standards, should have ended long ago -- has intensified to an almost hysterical pitch. Of the 393 Nasdaq stocks with market capitalizations over $2 billion, 155 have gained more than 20% in the past month.
You can round up the usual suspects: performance-crazed money managers engaging in year-end portfolio maintenance; retail investors and daytraders chasing higher and higher price targets; institutions for whom passing up the likes of
is simply no longer an option. Oh yeah, and there's
, the Nasdaq megacomponent that had been conspicuously flat since early April before catching wind this month -- to the tune of a 31% gain since Dec. 8.
Going With the Flow
Dash down some thoughts on our Nasdaq board
The bottom line is that money -- whether from tax-loss selling, via tech-concentrated mutual funds, or simply out of the piles of cash raised during the market's early fall selloff -- continues to flow into technology and Internet stocks at an absolutely torrid pace. And market observers are at a loss to say when it all will stop.
The Law of Accelerating Returns
Note: Index started at 100 on Feb. 8, 1971. Source: Nasdaq
"I don't know what to make of it in a larger context because there is no larger context to fix it within," said John Bollinger, president of
, and a guy who considers himself a pretty good student of market history. "I look back at the past manias -- whether the bowling stocks of the early '60s, the tech stocks of the 1970s or the airlines of 1990 --
and rarely has such a move been mounted without some support from the broader market."
Bollinger's just one of a growing number of people on Wall Street worried about how narrow the technology rally has been, and how long it's persisted. If, when the momentum element of the Nasdaq's uptrend first became clearly apparent early last month, some were concerned, now they're downright confused.
"I'm totally baffled by this market," admits Stanley Nabi, chief investment officer at
DLJ Investment Management
. "Everybody's chasing the same dozen stocks. I've never seen it this bad, and I've been in the business for 46 years."
Not everyone is as ready to call that rally a "mania," as Bollinger and Nabi are; those who do usually aren't as fully invested as they would like to have been in retrospect. At any rate, you don't need to be a lithium bull to understand the argument that technology stocks boast the highest growth rates, which alone can justify premium valuations.
"The sector's fundamental health is as impressive as any I've seen in years," says Charles Crane, chief market strategist at
Key Asset Management
. "But even a solid foundation can't support a thousand-story building. How far into the future are these stocks pricing perfection?"
No one knows the answer to that question, largely because investors have been too busy throwing money at entire sectors to have spent much time thinking about it. It doesn't usually pay to get the numbers exactly right, particularly with Internet stocks. If you can find a Net company that could dominate its market space one day the way Microsoft currently does its own, what does it matter what you spent?
It's unclear yet when the market will get the answer to that question. With fund flows expected to continue strong into January, tech momentum doesn't look ready to ease. A 25-basis-point tightening at the
meeting on Feb. 2, accompanied by an aggressively hawkish statement, may stem the tide. Disappointing holiday sales may knock the wind out of the leading e-tailing stocks. Perhaps we'll have to wait as long as April, when first-quarter earnings reports start flooding in, to separate the wheat from the chaff.
Some would like to see the tech and Net bellwethers get a helping of comeuppance. Nearly everyone agrees that some broadening of the market would be healthy. But momentum trends rarely broaden quietly, and a domino effect could cause a lot of pain in the market's more leveraged investors.
"All you need are a few of these stocks collapsing," Nabi says. "People don't have margin accounts on low P/E stocks because the profit isn't going to compensate them. All this debt is toward the speculative, high P/E stocks. These stocks can go down 30% to 40% overnight on a slight disappointment in revenues. Margin calls are going to be horrendous."
Happy New Year.