Tech’s ‘big horses’ hold Nasdaq hostage in bear mkt

Google, Research In Motion, Apple Inc and Amazon.com have dragged the index


NEW YORK: 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 Ltd Apple Inc and Amazon.com Inc — have reversed course and dragged the index with them.

The four stocks, accounting for about 8.4% 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.

But as the prospect of US 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. The scenario mirrors that of the aftermath 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. “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 capitalisation, down less than a percentage point from 2000.

Analysts say it is 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% 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% on the year, versus a drop of 16.3% for the index. Century Aluminum, meanwhile, is up 28.8% and James River Coal is up 75.8%.

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, US market strategist, at Cantor Fitzgerald Co 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% year-to-date, while Amazon is down 29.9%, Apple is off 38.9% and Research In Motion is down 13.6%.

To be sure, while analysts see the ;Big Four; companies’ growth prospects remaining very strong, some see restraints on each, and reasons 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.