The continuing volatile performance and short-term outlook for the high-tech sector seems set to remain at the forefront of stock market developments for some time yet.
Just when the Nasdaq market seemed to have regained some stability, slightly disappointing quarterly sales figures from Microsoft led to a sharp fall in the computer giant's shares. Weakness in Microsoft yet again damaged sentiment across the tech sector as investors continued to reassess the prospects and valuations of these highly rated stocks.
The failure of the Nasdaq index to hold onto its recent short-term recovery points to an increased probability that the current correction could be prolonged. One important factor that could lead to further, possibly sharp falls, is the extent to which investment in technology stocks has been funded by debt.
Given that a high proportion of trading activity in these stocks originates from speculative investors, it is likely that trading on margin, which involves borrowing to gear up the investment exposure, is substantial.
Hedge funds have been very active investors in technology and some of these speculative investment vehicles will have suffered during the recent market correction. For example, George Soros's Quantum Fund declined by 20 per cent in the first two weeks of April. The fact that these funds often take very large positions in individual stocks could mean that there is still potential for substantial further selling from this sector.
Day trading over the Internet by private investors has become a feature of the American stock market in recent years. These investors are able to borrow from their brokers by trading on "margin". This enables private investors to obtain a geared exposure to shares in the same way as hedge funds. This can prove to be extremely profitable in a rising market, but if the market falls suddenly, investors can find that all of their equity gets wiped out.
Margin debt has risen sharply in the past six months and it seems inevitable that the current bout of weakness will lead to some retrenchment in the amount of debt outstanding. This could well become another source of potential selling as private investors liquidate their stock positions to reduce their margin debt.
Not surprisingly, Irish stocks quoted on Nasdaq have shared in the overall weakness of the high-tech sector in recent weeks. Those investors that didn't participate in the Bull Run in these shares must be wondering whether the current weakness represents a buying opportunity. The table, (below), highlights just how sharp share price falls have been. Baltimore is currently trading at about 60 per cent below its peak price of $219, while Iona's share price is currently about 50 per cent below its recent high. By any standards these are precipitate drops and could well represent a buying opportunity.
However, before jumping to this conclusion, a different perspective emerges when one looks at the prices that these shares were trading at as recently as last November. In all cases current share prices are at least double the levels prevailing in November 1999.
In the context of the prevailing current market uncertainty, further declines in the prices of Nasdaq stocks that bring prices back towards their November levels is certainly a possibility and suggests that better opportunities to invest in these stocks could materialise. A policy of wait and see before investing could well be the most rewarding approach until current uncertainty evaporates.
