On Oct. 8, OldTrader made the call: The market has bottomed, and the tech bull is back. "This is what a bottom looks like -- sell when the cannons are outside the fort, buy when they are in the courtyard," OldTrader posted on SiliconInvestor.com's message board. OldTrader, known offline as Bill Michaels, a 70-year-old La Jolla, Calif.-based stockbroker who has been successfully trading tech stocks for 43 years, began scooping up more shares in Dell ( DELL) and Intel ( INTC). "Market bottomed," his post concluded, "Go get rich, folks." While Michaels was advising his colleagues on the individual investor boards, his timely post may as well have been offered to mutual fund managers, many of whom have subsequently echoed that the
market bottomed in early October and that technology may pace the recovery . Money managers and individuals have been disproportionately funneling money into the beaten-down tech sector. Since Oct. 9, the S&P 500 is up 14.5%. The Nasdaq Composite, meantime, has climbed 25.9%, the Nasdaq Telecom Index has added 37.6% and the Philadelphia Semiconductor Index has surged 40.3%. However, many market professionals and academics caution that tech stocks remain richly valued, highly risky and far from pole position for 2003. "Tech stocks have rallied more because they are more volatile -- when the market moves, they are going to move by some greater multiple on the upside and downside," says Jeremy Siegel, professor of finance at the University of Pennsylvania's Wharton School and author of Stocks for the Long Run . "The market is going to be decent next year, but nothing great, and I don't think you're going to see leadership coming from technology issues."
Extensive studies show fund flows tend to track hot performance, which means that if individuals start putting the trillion-dollar mattress to work in early 2003, much of the cash may chase newly hot tech stocks. "After a bubble, people go back to last cycle's leaders, but those stocks never really hunt again," says hedge fund manager and RealMoney contributor Bill Fleckenstein, who is short-selling several technology stocks. "Each time they go back, it works less and less well until they stop -- the same thing happened when oil stocks blew up." At the height of the oil stock mania in the late 1970s and early 1980s, the energy sector represented roughly 30% of the S&P 500. Over the next few years, despite some big short-term rallies, the sector ultimately tumbled to a weighting of less than 6%. Technology and telecom stocks have been charting a similar course since the March 2000 peak. Combined, the information technology and telecom services sectors represented 43% of the S&P 500 on March 10, 2000; this week, the sectors make up 18.9% of the index. While that marks a major decline in tech and telecom's weighting, it still represents a sizable chunk of the benchmark index. Since many index funds -- and, more informally, many actively managed funds -- take their asset-weighting cues from the S&P 500, it's hard to argue that most investors are too light on technology even after the bubble has burst. The average domestic equity fund, for instance, had 19.7% in information and technology sectors at November's end, according to Morningstar. (Investors interested in determining how large a weighting technology represents in their portfolio should check out Morningstar's
Instant X-Ray tool.) "If you're in tech stocks, you need to be looking for places to sell them when they rise," said Sam Burns, a strategist at Ned Davis Research in Venice, Fla. Burns says his firm believes equities are in a cyclical bull market within a secular bear market, and that tech is highly unlikely to lead in 2003. "There's a good chance that once tech stocks have had their big rally, they'll roll over and go back down again."