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Year-End Rally? Better to Buy for a 3-Year Rally

October 22, 2000|Tom Petruno

Unlike some Hollywood actors, Wall Street seems to know how to follow a prepared script.

The script, in this case, called for the troubled stock market to bottom in October, just as it reached decisive turning points in Octobers of 1999, 1998, 1990 and 1987.

The rally that began last Wednesday morning kept going on Thursday and Friday, halting the market's losing streak at six weeks. The Nasdaq composite index surged 5% for the week, which trimmed the net loss from its March peak to 31%.

Perhaps only investors whose portfolio losses for the year had been close to 40% could be delighted with a 31% loss. But it's the trend that matters most here, of course. What investors--and particularly technology stock investors--want to believe is that the market's direction has changed for good.

If share prices have in fact bottomed, plenty of highly compensated money managers who have been predicting an October turn ought to be feeling pretty silly. Why were they selling at the lows early last week--driving Nasdaq down 9% from Monday through the Wednesday morning low--if they were confident that the tide would be turning?

Some mutual fund managers would argue that they didn't have much choice: Because they are supposed to close their books, for tax purposes, by Oct. 31, this month each year can become a time of almost forced trades--mainly to take losses to offset realized capital gains, so that fund shareholders aren't hammered with a massive capital gains payment in November or December.

That's the fund industry's line, anyway, and they're sticking to it. The point is, if your fund manager was going to sell Microsoft last week, would you have preferred that he or she sell at last Monday's close of $50.38, or at Friday's close of $65.19? Call me old-fashioned, but I'd take the higher price.

Obviously, the problem early last week was that many investors had given up hope for an October market bottom, and figured it was time to pull the plug before their losses deepened. They may yet be vindicated: There are seven trading days left in the month, and the situation in the Middle East, and thus with oil prices, remains potentially perilous.

What's more, the fact that the Nasdaq composite index scored its third-biggest one-day percentage gain ever last Wednesday, soaring 7.8%, can't be all that consoling to Wall Street. Eight of the index's largest one-day percentage gains have occurred since March, but Nasdaq is still in a bear market. History has shown that bear markets often are peppered with violent, but temporary, rallies.

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If last week was indeed the start of a sustainable rally, Bill Gates' software behemoth will get much of the credit. Microsoft's quarterly earnings report last Wednesday was roundly cheered, mainly because of a better-than-expected sales gain. (In fact, earnings from the software business itself were actually lower than a year earlier. Only a gain on the company's massive investment portfolio lifted net earnings.)

Microsoft, as befits a leader (or a manipulator, depending on your point of view), also tried to rally the tech troops with an upbeat forecast for sales in the current quarter and into 2001, which assumes Windows 2000 software sales will continue to pick up from what had been a sluggish debut in February.

Another tech industry leader, wireless phone giant Nokia, went so far as to move up its surprisingly good earnings report to last week, from the coming week, as tech stocks worldwide continued to sink through Wednesday morning. Nokia's report, issued Thursday, drove its shares up 27% that day, which would be a decent one-year gain for most stocks.

On Friday, though the tech rally overall cooled significantly from Thursday, Nokia added another $1.06 to $39.19.

Lest potential buyers of Microsoft or Nokia think they've missed the boat, it's worth reminding that these stocks have a long way to go before they even retake their recent peaks. Microsoft was a $119 stock last December; Nokia was a $62 stock in June.

It's also important to keep in mind that some major trends remain at work in the technology sector specifically and in the economy in general: the dimmed appetite for personal computers, the brutal though inevitable shakeout of "dot-com" companies (which last week drove Pasadena-based technology incubator Idealab to pull the plug on its planned stock offering, which once was a sure bet to boost the base of Pasadena millionaires), and the intensifying competition across virtually all tech sectors.

The astounding availability of stock and bond financing for tech companies from 1998 through spring of this year, as investors were all too happy to fund every new idea that came their way, has created scores of new players all battling fiercely for a bigger piece of the pie in their respective markets.

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