“Speculation is alive and well in the stock market. But far from being reason for cheer, that may be reason for concern,” writes Ken Brown in today’s Wall Street Journal.

“Just how hot have speculative stocks been? The most speculative technology stocks rose 48.2% between April 4, when the Nasdaq Composite Index bottomed, and Monday, according to numbers crunched by AQR Capital Management. The New York money-management firm defined speculative tech stocks as those in the broad Russell 3000 index with either no profits or trading at more than 50 times their trailing 12-month earnings.”

“The firm found that more-pedestrian tech names — those trading at less than 50 times their trailing 12-month earnings — were up 29.8% during the period, while nontech stocks in the index returned 9.9%. As for the Nasdaq Composite Index itself, it was up 27% between April 4 and Monday.”

” ‘We were up 30% in April,’ says Mitch Rubin, manager of Baron iOpportunity Fund, one of the few tech-heavy mutual funds that can make the claim of being up for the year, given that the Nasdaq index remains down 16% since Dec. 31 despite the recent rally. ‘That scares me just as much as being down 30%.’ “

“Indeed, the lackluster response to the Federal Reserve’s interest-rate cut of one-half percentage point Tuesday underscores that the market may have gotten far ahead of the economic and corporate fundamentals that drive long-term stock performance. And a new study by Goldman Sachs — one of the first quantifications of the degree to which the Internet bubble of the late 1990s contributed to revenue and earnings growth in the tech sector — questions whether those fundamentals will improve substantially anytime soon.”

“The market’s April euphoria extended all the way down to its most battered sector: recent IPOs. Many of the market’s most speculative stocks are companies that went public in the late 1990s, rose to death-defying heights, then plummeted to single-digit prices once the Internet bubble burst last year. There are 520 unprofitable companies trading in the stock market right now that went public in the past two years, according to Bogle Investment Management, 15 times the number a decade ago. These stocks, about half of which hail from the tech sector and 43% of which trade below $3 a share, have returned an average of 45.8% since the bottom.”

“Of course, the riskiest stocks always lead the market on the way up and the way down. While many money managers would normally avoid these risky stocks, they are afraid of being left behind. ‘A lot of investors certainly understand they don’t want to miss a rally,’ says Laura Conigliaro, a tech analyst at Goldman Sachs, who adds: ‘If your performance has not been good for a year and a half, you can’t afford too much time to get that performance moving.’ “