John Madden, the ex-football coach and veteran NFL game broadcaster, would make an ideal stock market commentator.
Madden, with the aid of his nifty telestrator, perfected the art of making bold assertions after the end of each play, usually with no idea about what is to happen next.
If the essentially random play-by-play happens to form a successful pattern in accordance with Madden’s early opinions, the player validating his remarks is hailed as the best to play the game.
But if judgments Madden states in the first quarter turn to dust, they quickly are forgotten. Any player appearing to be responsible for the reversal becomes a bum.
The Nasdaq stock market has reached the same state of randomness, making yesterday’s analysis void today. Whereas the Nasdaq composite index oscillated around the 4500 mark in March, it appears to have settled into rotating around the 3500 mark in April.
In other words, the handful of stocks that dominate the Nasdaq index have stalled at an extraordinary 40 percent gain from last April, when the index traded at about 2500, instead of an doubly extraordinary 80 percent gain. I know it’s tough to take.
No one knows whether, or in what direction, the current pattern will break. You have an equal chance guessing coin flips. Yet, as Madden surely would agree, no one gets paid to analyze coin flips.
It seems apparent, however, that strong first-quarter earnings reports by many high-profile technology companies have halted the 1,000-point Nasdaq slide to the 3500 pivot point, at least for now.
Sensing this, investors are bidding up tech stocks before earnings releases. JDS Uniphase, a firm that came out of nowhere last year to symbolize new economic innovation, soared 16 percent Tuesday–equal to Monday’s percentage drop by Microsoft.
After the close of trading, JDS indeed topped analysts’ forecasts, barely, in announcing quarterly results. Naturally, the share price slipped in after-hours trading.
In some cases, strong earnings reports are being rewarded after the fact. On Tuesday computer equipment retailer CDW Computer Centers, based in Vernon Hills, soared 20 percent, or $16.19, to a record closing high $97.50, after posting robust quarterly results.
In either case, investors prone to worry should dread the end of this quarterly earnings reporting season. In about a week, there will be nothing between a highly vulnerable stock market and the usual crescendo of anxiety ahead of the May 16 meeting of Federal Reserve monetary policymakers.
Contagion effect: In 1997 and in 1998, investors worried about whether financial crises in Asia would spill over to the U.S. economy and U.S. markets. Remember the “Asian flu” imagery?
Today, it seems, the technology-stock mania has infected stock markets globally, drying up capital for more mundane enterprises.
According to analysts at J.P. Morgan Securities, tech stocks peaked globally March 27, two-plus weeks after the March 10 top on the Nasdaq composite index.
But tech stocks in the United Kingdom, Europe, Japan and Asia remain far ahead of U.S. tech stocks in terms of being overvalued against aggregate market averages and against historical indicators of tech stock performance.
As of last week, for example, the price/earnings ratios of tech stocks in the U.K. were nearly four times higher than the P/E of the total U.K. equity market, according to figures used by J.P. Morgan from Datastream..
Tech stock P/Es in Asia, Japan and Europe were running about three times the aggregate market P/Es in those regions.
In the United States, by contrast, tech P/Es were running about twice the level of the total market P/E–still a rich valuation.
The 10-year average premium to the market for U.S. tech P/Es is about 35 percentage points, compared with 112 percentage points today.
In the U.K., the average tech P/E premium is about 75 percentage points above the market P/E, compared with about 275 points now.
“We do not mean to imply that there is relative value in U.S. technology but rather that tech stocks look expensive everywhere and that attention to global diversification makes a lot of sense now,” the J.P. Morgan analysts said. “We don’t think that the recent weakness by the tech sector has run its course, mainly because very little excess has been taken out of the sector’s valuation.”
