Tech stocks shouldn't look this bad

published 24 November 2008

You'd expect financial commentators to have discussed the many reasons for the stock market's selloff lately. After all, waffling is what they do best!

The bug seems to have crept to the onlooking investing public, too, though, with everyone becoming an overnight expert and tossing their two cents into the mix.

But really, when it comes right down to it, alongside widespread fear, there are two main factors responsible for the moves:

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* Accelerating & Decelerating Rates Of Profit Growth

* Supply & Demand

Usually, the two work in tandem because changes in fundamentals drive the demand for a stock. However, this hasn't been the case over the last two months, as extraneous events have caused liquidations.

Negative news stalks the markets

On Wednesday, 98% of the daily volume fell on the downside, as another torrent of negative data pointed towards more economic turmoil.

The latest batch of badness meant that it was no surprise to see the markets react by tumbling yet another 400 points - and crashing right down through yet another support level.

The Fed is now projecting unemployment rates of around 8.5% by the end of 2008. Of course, if that holds true, the vicious cycle of bad news will continue.

So what are the pros doing?

Quite simply, they're taking steps to prepare for a long, drawn-out bear market. But while they're willing to follow their own advice, few are actually willing to risk their reputations as negative sell side commentary scares investors away.

Of course, there's a good reason for their nervousness, since unchecked supply is driving the market down, despite facts and data that should make a difference.

For example, take Friedman, Billings, and Ramsey's (NYSE:FBR) announcement weeks ago that Apple (Nasdaq:AAPL) was going to have to cut its iPhone production by 40%.

This interesting piece of speculation played into the stock's dive from $110 to $80 over the last month. The sad part was that it was merely speculation, which a Digitimes article recently refuted, highlighting that Apple expects to produce eight million iPhones this quarter. That would render production levels flat, not cut.

The problem is that such positive news isn't going to matter until CNBC stops publishing its incessant supply of bad news. But don't expect that to happen until the January earnings season begins.

The fear generated by this kind of commentary is creating supply instead of reporting it. In the absence of support through fundamental upside surprises, stock buybacks and mergers, it's hard for the market to find a bottom.

Why technology stocks shouldn't look this bad

Late changes in profit growth expectations are what drive share prices higher or lower. And in the last quarter, despite relatively good technology results, there were enough guidance reductions to significantly alter the 10-year period profits.

A key part of the guidance reductions were due to the strengthening dollar - as I wrote about here on August 25. That, along with the confluence of the financial bankruptcies, credit crunch, and the beginning of the European rollover in demand, means there won't be another leg down for estimate reductions.

While it would be nice to offer some magic formula to eradicate the problem, investors can't do much to influence either supply or demand. And that means the best piece of advice I can give is to remind you that the forces at work in the near-term are not related to fundamentals. They're simply a part of the bottoming process.

Put that aside, and you'll be able to see that technology is as strong as ever.

By Paul Moore for the Smart Profits Report