(October 11 – 17:10 ET) – Where is the bottom for technology stocks? That question is on the minds of many investors right now. Merrill Lynch Chief Quantitative Strategist Richard Bernstein suggests techs still have a way to fall.
The tech stock selloff accelerated this morning, but by noon the sector was erasing its losses. Is the correction over? Not likely says Merrill. “Although shorter-term rallies might occur, none of these gauges shows there is sufficient pessimism surrounding the technology sector to suggest a definitive bottom,” says Bernstein. “We still prefer to underweight the sector despite its significant correction.”
The Merrill Sell Side Indicator, the brokerage firm’s market-timing barometer, remains extremely close to the indicator’s highest (most bearish) reading ever. Merrill’s best guess suggests that there is, “amazingly little pessimism surrounding Nasdaq despite the correction”.
Merrill suggests that analysts may be underestimating the cyclical nature of technology stocks. “We have thought that any possible hint of cyclicality might cause the sector to be revalued downward. Our concerns have been that analysts were being blinded by the claims of the “new economy,” and might not be considering the inherent cyclicality of the technology sector.” Merrill suggests that investors are overestimating the growth rate for tech earnings.
“Although Nasdaq has corrected substantially, we still believe valuation remains extreme. In other words, the bubble is deflating, but it has not deflated,” says Bernstein.
-IE Staff