Tech Falls Into Bear Trap -- Can Investors Escape?

Jeff Cox, |Special to

Don't look now, but tech stocks just slipped into bear market territory.

While investors were busy worrying about the financial sector, the Nasdaq Composite Index--the primary gauge of tech shares--hit the 20% decline that puts it into bear territory.

Though the other main stock indexes--the blue chip Dow Jones Industrial Average and broad S&P 500--also have taken a beating this year, they're well short of the 20% threshhold.

What happened? Believe it or not, the subprime meltdown that hit the financial sector is having a ripple effect on tech. Many companies--including banks--are cutting back on spending. And that means fewer sales of computers, networking gear and other high-tech equipment.

"We are seeing our U.S. and European customers being increasingly cautious," Cisco Systems CEO John Chambers said late Wednesday, after the computer networking company reported fourth-quarter earnings.

"We do think there is a very cautious attitude in the boardroom and that is different from six months ago."

Bear Market Territory

While other tech bellwethers such as Apple , Google and Microsoft have faced pressure on their earnings, it was Cisco's downbeat forecast that finally sent the Nasdaq past the 20% decline that put it into bear territory.

The tech index did rebound on Thursday, but some analysts think the recovery is only temporary.

"Nasdaq is going to go down because it's more of a growth-type of an index and more cyclical than the big average," said Peter Miralles, president of Atlanta Wealth Consultants.

Charting A Course

"We have a bit of a bubble, plus we have a normal correction," said Mike Kresh, president of M.D. Kresh Financial Services in Islandia, N.Y. "The triggering factor is not something you really expect, like a slide into recession. But an outside, unexpected event such as the total disaster of the subprime mortgages and how it's affecting everyone emotionally. Those are stronger in the short term than the fundamentals."

Another reason the Nasdaq may remain weak is that it lacks some of the higher dividend-paying stocks that are more prevalent on the broader Dow Jones Industrial Average and Standard & Poor's 500.

"You're going to have people starting to get crunched in interest-rate investments," Miralles said. "As they start to get into the equity markets they're going to be looking at companies that can replace those cash-flow dividends, and the Nasdaq's not where they're going to go first."

Market Plays

Despite the Nasdaq's weakness, that doesn't mean investors should avoid it completely.

Kresh sees Apple as a bargain as it slips closer to $100 a share, while Miralles forecasts a general opportunity in falling prices as the index feels for its low.

"You can't call a bottom in this thing. This is the type of environment that we're going through right now that is setting up the great buys we're going to see in the next half-dozen years," Miralles said.

In fact, Cisco is on buyer lists now despite its cautious outlook.

“Cisco’s looking at 12 to 17 percent growth, and investors do get too caught up in the short-term," said John Buckingham of Al Frank Asset Management. "You’re having a hiccup here, maybe it lasts a quarter, maybe its two quarters, but in the long-run, three to five years, which is what I’m always looking at, I think you want to be a buyer of Cisco here.”

Joe Clark, of Financial Enhancement Group, also is recommending Apple as well as navigation and communication device manufacturer Garmin .

"You’re seeing mid-range buying doing pretty well.  The mid-range has got money and they’re still wanting to buy gadgets, whether it’s Apple phones or Garmin, and that’s software driven.”

Some analysts think the Nasdaq may just be going through a normal downturn from which it will soon recover.

"It's the most volatile part of the market and it's the part the hedge funds love to trade," said Mary Lisanti, of AH Lisanti Capital Growth. "This is just part of a rolling correction that's pricing in an economic downturn."