Tech's 'Horses' Hold Nasdaq Hostage in Bear Market
Nasdaq's bear market is likely to persist longer than the pullback in the broader stock market unless the recently battered technology heavyweights make solid comebacks.
Since October, when they led the index to a 52-week closing high, the so-called four-horsemen --Google, Research In Motion, Appleand Amazon.com-- have reversed course and dragged the index with them.
The four stocks, accounting for about 8.4 percent of the Nasdaq Composite's $3.6 trillion market value, were investor darlings as worries swept the market at the start of the subprime mortgage crisis. Investors saw successful technology companies' strong balance sheets and global exposure shielding them from the global credit storm.
The scenario mirrors that of the stock market bubble being popped in 2000, when the Nasdaq lagged the other indexes' recoveries as a handful of heavy-weights dragged on the entire sector. The index continued to lag for years.
But as the prospect of U.S. recession became more likely in recent months, these companies, which are dependent on consumers buying iPods and BlackBerrys, have started to follow the general downtrend of stocks and is now depressing techs stocks in general.
"You need the participation of the biggest stocks to pull out of the spiral," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati, Ohio.
"It's tough for those leadership stocks to go down and then have the rest of the market go higher. That's not usually the way it works."
Even after the bursting of the tech bubble, information technology still accounts for about half of the Nasdaq's market capitalization, down less than a percentage point from 2000.
Analysts say it's difficult to work out any scenario in which the Nasdaq will shake off the bearish sentiment without a strong tech sector recovery led by the horsemen.
That's unlike the S&P and the Dow, where a healthy rotation can take place. If one sector can no longer lead the way, another takes its place. For example, after the tech bubble burst in 2000, speculators moved into financials, propelling the two indexes to record highs by October 2007.
Meanwhile, even after the runup that took the Nasdaq to its 52-week peak in October it was still nowhere near the highs it hit at the height of the tech bubble in early 2000.
The second-biggest sector on the Nasdaq is healthcare, which includes biotechnology companies like Amgen, and holds some promise, as the group is seen relatively resistant to economic downturns. But the sector accounts for only about 14 percent of the market's value.
Indeed. not much help can be expected from the next two largest sectors. Consumer discretionary would fare worst in a recession, while financials are in their own bear market.
Still, there are areas that investors could take shelter in. The boost from commodity-related companies, for example, has limited some of the damage in the broader Nasdaq Composite index, as global metal prices and other natural resources soar.
Steel Dynamics' stock is up 4.4 percent on the year, versus a drop of 16.3 percent for the index. Century Aluminum , meanwhile, is up 28.8 percent and James River Coalis up 75.8 percent. Another bright spot are solar stocks -- but there are only about a dozen of them on the Nasdaq compared to 804 tech stocks.
Given this backdrop, analysts say the Nasdaq's downturn will likely last through spring and even beyond as recession fears grow.
"Tech is not going to be the leadership group until the economy starts to improve and that's not expected until the second half," said Marc Pado, U.S. market strategist, at Cantor Fitzgerald in San Francisco.
Not that this means the big tech stocks should be entirely counted out. Anytime expensive stocks such as Google drop, investors who missed the popular shares on their way up will likely swoop in, said Pado.
Google's shares are down 32.3 percent year-to-date, while Amazon
is down 29.9 percent, Apple is off 38.9 percent and Research In Motion is down 13.6 percent.
To be sure, while analysts see the "Big Four" companies' growth prospects remaining very strong, some see restraints on each, and reaons their shares should be lower.
Google will likely face stronger competition if Microsoft succeeds in taking over Yahoo. Apple needs another hot product to follow iPod and iPhone. Research in Motion is closely tied to corporate spending and could be hurt by the woes of the finance sector. Amazon, meanwhile, struggles with profit margins as booming Internet commerce expands.
Some see technical factors at play and some analysts are keeping a close eye on charts to try and gauge when the worst may be over.
According to Sparks at Schaeffer's Investment Research if the Nasdaq Composite index broke through near-term resistance at the 2,400 level, that would be a step in the right direction. But, he says, if it gets rejected from that level again, "it is not impossible for it to be months" before it got out of bear territory.
And if there were a rebound, it has to be accompanied by significant trading volume which would indicate that investors have put aside their fears.
"What we need to see is a market that behaves on the way up, like it has been behaving on the way down. We're not seeing that just yet, we need the volume." said John Wilson, chief technical strategist at Morgan Keegan in Memphis, Tennessee.