Technically Speaking: Queasy investors stay guarded as tech wreck keeps on going

Friday 15th December 2000

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Nasdaq composite

Compuware

Dell Computer

Intel

Microsoft

Oracle

Yahoo

The tech stock smash has dominated sharemarket news over the year.

The charts show the tech-rich Nasdaq index and some household name stocks associated with it. These pictures are ugly to look at for those who bought the shares at or around peak value. In percentage terms losses are catastrophic.

The value of stop-loss sellout criteria is strongly reinforced by the graphs.

It is not surprising the US economy is slowing down, in part due to falling consumer confidence, when the amount of wealth investors have lost in the great internet bubble is taken into account.

Share-buying US households must be feeling queasy now. Staff retention could become problematic for companies that remunerate through share options.

It is hard to predict what will come next for tech stocks. The graphs show they are undervalued on a technical analysis view so we should see them rally in the new year as Americans regain confidence on lowering interest rates and the resolution of the US presidential election.

Many of these stocks are tracking under one-year and two-year moving averages as plotted on the charts.

On the other hand, the mood of the US sharemarket has swung to arch-conservative as befits the start of the George W Bush presidency. Bush appears even dumber than Ronald Reagan but he could turn out to be perfect for a sharemarket that does not want a regulating zealot in charge.

Investors have become more sophisticated about shares labelled high tech, b2b, b2c, new economy or internet stock. Their new mood will lead them to favour companies under these headings that already have some good earnings streams or at least probable ones.

Companies with poor earnings outlooks or distant payoffs will be ripe for closure or takeover. High price/earnings multiples will most probably be frowned on and could lead to further downside risk.

The market's swing indicates venture capital may not be so readily forthcoming or that investors will tend to favour diversification through specialist managed funds rather than risk large sums on direct investment.

The pace of tech stock investment should slow down and produce a guarded recovery that is highly selective in its effect. Old economy stocks that have found a successful new economy twist may be favoured.

The internet revolution is not over yet and not all of its effects have been felt. When asked whether he thought that the French revolution had been successful, Chinese premier Zhou En Lai responded that it was too early to tell.

It is the same with tech stocks. But if the jury stays out over 2001, we will not see a rapid return to the former stellar price level.

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