Has technology bottomed out?

Has technology bottomed out? That’s the burning question on everyone’s mind as we move through the second half of January. And I can’t think of any better cure for the January blahs than a recovery in this most critical sector of the economy.

Nasdaq’s performance in the second week of the month fuelled speculation that the worst may be over. Although it ended a three-day winning streak with a 14-point loss on Jan. 12, Nasdaq still managed to post a gain of slightly better than 9% on the week. That was all the more impressive in the face of a lot of discouraging tech news, including profit warnings from Yahoo!, Gateway and Hewlett-Packard and discouraging sales projections from Nokia. It’s almost as if these warnings have become so commonplace that they’re now just rolling off investors’ backs, like water off a duck.

Also during that week came the news that retail sales in the U.S. finished stronger than expected while the December Producer Price Index figures showed a jump of 0.3%. Those developments were interpreted as bad news by the bond markets and raised concerns that the U.S. Federal Reserve Board will have to adopt a more cautious approach to further interesrate cuts than had been originally expected.

Still, Nasdaq rose and the rally was all the more impressive because it was not reflected in the broader markets. The Dow Jones Industrial Average was off slightly for the week, while the S&P 500 showed only a modest 1.6% gain. Our own TSE 300 just about broke even.

To try to get a better handle on just what the markets are telling us, I scanned through all the U.S. indexes. It turns out the biggest gainers that week, somewhat surprisingly, were the Dow Internet indexes, with the Internet Composite jumping an impressive 16.4%. That suggests investors believe this particular sub-set of the technology sector has been beaten up worse than the rest, with the result that there are a lot of bargains out there to be scooped up.

I’d like to believe that the worst is indeed behind us, but I’m not ready to start cheerleading yet. A three-day rally does not a market turnaround make, and there still many ominous signs out there. I think there is a lot more volatility yet to come, and that we’re going to continue to see big swings in investor sentiment for several weeks at least. We may well retest the Nasdaq lows before the end of the winter.

That said, some very good technology companies are starting to look attractive at these price levels. You have to pick carefully, and a strategy of gradual accumulation is a good idea in these circumstances. But there are opportunities out there for those who can tolerate the current market gyrations and are willing to show some patience.
 Adapted from the Internet Wealth Builder, a weekly e-mail newsletter edited and published by Gordon Pape. For membership information and a free sample copy, go to  http://gordonpape.fifty-plus.net/newsletter/iwbnl.cfm