You'll get your Mac news here from now on...

Help TMO Grow

Subscriber Login

Advertising Info


The Mac Observer Express Daily Newsletter


More Info

Site Navigation

Home
News
Tips
Columns & Editorials
Reviews
Reports
Archives
Search
Forums
Links
Mac Links
Software
Reports
Contact

by Wes George
 Apple,

Finances,

Money,

and Trading.

Mmmmmmm...... Good




The Descent into Darkness
April 17th, 2000

Margin accounts, like little stars in the night sky, are going out all across the heavens. In the illiquid blackness of our darkness market nightmare there are only fevered asks without a bid in sight.

Like everyone else who took up positions in the market recently, the Mac Observer virtual portfolio of technology stocks is under water. Like everyone else, we're grasping for straws to explain what's happening in the market and how long it will take for things to return to normal.

Of course, "the norm" for the stock market in the last year has been a total aberration by any historical measure. The Nasdaq was up over 80% year over year-- that's about 500% better than the historic average. Meanwhile, volatility has been ratcheting steadily higher to levels never experienced in the Nasdaq's 29 years of operation. The Dow has reached levels of volatility not seen since October 1987.

Even after the Nasdaq gave up 35% of its gains from the all time high of 5048 on March 10th, the market remains up about 40% from a year ago, still a record 52-week gain for the Nasdaq.

This so-called correction is just now gaining steam and could blossom into a full scale global panic this week.

Markets that live by momentum die by momentum.

The Wall Street Journal disingenuously attributes the high market volatility to online traders with instantaneous access to news. Wrong!

The Internet has changed the dynamics of the stock market by creating the largest and most egalitarian equity market in history. But the market volatility is the result of the super-high valuations of many technology stocks rather than Wall Street's newfound trend towards equality through networking technologies.

When a stock like Yahoo or Cisco rises above any imaginable valuation that can be justified by fundamental analysis, all an investor can do is turn bearish or find a new rationale (such as touting a "New Economic" Paradigm) to account for the high price of this stock.

Bearishness has its disadvantages. People flamed my column when I predicted that a severe crash was coming, as I did on March 13th. Most bears have been in hibernation after learning painful lessons about shorting markets with growing parabolic curves. They're coming out of their caves this spring and they're hungry.

The only way to win in a soaring market with no underlying fundamental support is to play the momentum game. After all, once the market is cut loose from any rational moorings, how can you assign a meaningful valuation to a stock?

Technical Analysis, Momentum and Greater Fools

Buy the stocks that are going up! Duh. With triple digit PE ratios there is only one reason to buy into companies like Yahoo and Qualcomm: their prices are rising. But you can't buy and hold at these ridiculous levels. Buy and hold is what you do with value, not hype.

And that's why the market is volatile. The corollary of the momentum trader's axiom-- "Buy hot stocks that are soaring"-- is that there must be a greater fool waiting at the top to buy the worthless paper.

As soon as momentum swoons, you've got to bail out. Until recently, the supply of greater fools seemed infinite; now, the opposite effect of downside momentum is occurring: with zero fools to sell to, the devil is taking the hindmost.

This week is either going to 1) be a miraculous comeback, or 2) get really, really dark and scary as sanity returns to an insane market in the form of panic.

The Miraculous Come-Back Scenario

Institutional and retail investors could see the low on Monday, April 17th, of (just guessing) 2950 on the Nasdaq as the buying opportunity of the decade. After all, the premise of the New Economy is that stock prices have been historically too low for the level of risk they entail.

Furthermore, this correction is not the beginning of a bear market by any traditional standards. Last week's market crash was a complete disconnect from the hot US economy, which is happily chugging along at near-record growth and productivity rates. Inflation is hardly an issue. What's unfolding in the equity markets is a technical market correction. Unlike past bull market tops, this one does not herald an upcoming business cycle downturn and so it can't last long.

The highly oversold Nasdaq has retraced a comfortable Fibonnacci ratio to the downside and is ready for a bounce. The good news emanating from the strongest technology earnings season in a long while could cut loose a torrent of buyers.

Because of the accelerating effects of the Internet, the market recovery could be reduced to weeks instead of the months required in the past for market drops this steep to rebound.

The Nuclear Winter Scenario

Get real!

The best technology stocks are still highly overvalued. Yahoo has a price-to-earnings ratio of 591, while Qualcomm's is 275. The average P/E ratio of the Nasdaq 100 is currently about 150--historically it has been in the 30s. There hasn't been real fear and capitulation among the investors of these bloated behemoths. The Titanic hit the iceberg, but they're still dancing in first class.

Yahoo, currently a $116 stock, could sell off to $70 per share and still sport a regal P/E of 300! The psychological effect of such a sell off would crash even the low P/E stocks, like Apple's, back to levels not seen since last year. A true market panic could ensue, liquidity could dry up and the markets spin into an out of control free fall, at least temporarily, through support at 2500.

Good earnings reports couldn't save the market last week, so why will they save it this week? Especially with IBM likely to actually miss earnings with flat revenues, and Microsoft lamely propping up their weak growth with one-time gains by selling some of their investments. Lucent is also scheduled to report this week and no one expects any upside surprise from the company.

Moreover, a stampede of frightened investors taking advantage of any uptrend to get the heck out of the way will quash any bounce back rally, while technical traders will use every uptick to short. The real kicker is the short week: markets are closed on Good Friday, further perturbing the safety of routine. There will be more people in church this Easter.

The real bottom to this crash could be much lower. There is no sound fundamental reason for it to stop here, while there is a strong technical argument for a loss-of-confidence free-fall to 2000-2800. It may take another week or two to get there. Then an extended period of sideways trading in the range of 2800 to 3500 is likely while the survivors lick their wounds and bury the dead.

The good news is that the world economy is strong. A stock market crash from these heights is unlikely to change the business outlook, except for companies leveraging their market cap inappropriately.

After every dark night comes a bright morning. Most of us will still be here, I trust.

Your comments are welcomed.


Check out the Apple Trader Forum in the new Mac Observer Forum section! Talk about Apple's stock, the markets, or give your best stock tips, just come on in!

The Apple Trader's Most Recent Columns

The Dawning Of The Age Of Aquarius?
January 2nd

Apple's K-10 And Apple's Future
December 18th

Apple's Stock: A Double Your Money Gamble?
December 4th

The Apple Trader Forums

The Apple Trader Archives

Back to The Mac Observer For More Mac News!


Wes George writes about the financial side of being a Mac nut. Wes has followed Apple's finances for the last 7 years and comes to The Mac Observer every Monday to tell all about his opinions. He is, in his own words, "inordinately fond of money." If you would like to write Wes, make it nice. Someday you might own a company that has something to do with Apple, and Wes will probably still be writing for The Mac Observer...... On the other hand, Mr. George is known to love a rousing, hair-raising debate, so send him your worst!

Disclaimer: This column is for informational and entertainment purposes. While Mr. George may be sage indeed, his writings can not be construed as a solicitation to buy, nor an offering to sell any particular stock. As with any trading in the financial markets, you must use your own judgment to make the best trades that you can. Neither The Mac Observer nor Wes George may be held accountable for trading advice.



Today's Mac Headlines

[Podcast]Podcast - Apple Weekly Report #135: Apple Lawsuits, Banned iPhone Ad, Green MacBook Ad

We also offer Today's News On One Page!

Yesterday's News

 

[Podcast]Podcast - Mac Geek Gab #178: Batch Permission Changes, Encrypting Follow-up, Re-Enabling AirPort, and GigE speeds

We also offer Yesterday's News On One Page!

Mac Products Guide
New Arrivals
New and updated products added to the Guide.

Hot Deals
Great prices on hot selling Mac products from your favorite Macintosh resellers.

Special Offers
Promotions and offers direct from Macintosh developers and magazines.

Software
Browse the software section for over 17,000 Macintosh applications and software titles.

Hardware
Over 4,000 peripherals and accessories such as cameras, printers, scanners, keyboards, mice and more.

© All information presented on this site is copyrighted by The Mac Observer except where otherwise noted. No portion of this site may be copied without express written consent. Other sites are invited to link to any aspect of this site provided that all content is presented in its original form and is not placed within another .