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On Mar 11, 7:37am, Don Ewers wrote:
> Avoiding trying to figure when and where the NASDAQ will potentially turn
> for the moment, what is the criteria one should use to invest again in
> technology.
If we're looking mainly at big cap techs, then the following
http://www.cross-currents.net/charts.htm
has a chart ("How Far Can NASDAQ Fall?") showing the min. P/E's of a
few of the big tech. stocks over the 1995-2000 period (which was
*not* a period when tech. was trading on the cheap). According
to that chart, prices on the big techs could drop a full 60% to 75%
before the techs. reach "value" levels.
The following report also has a lot of relevant data on NASDAQ valuations
as of December, 2000:
http://www.nasdaqtrader.com/trader/tradingdata/performanceoverview/200012pf.pdf
(I've attached a one page excerpt.)
Here's a different approach. First, assume that the NDX 100 is a
reasonable proxy for high cap. tech stocks (last I looked, about 65%
of the NDX weighting was in tech.). Second, assume that the S&P 500
is a reasonable proxy for the broad market (though a full 35% of the
S&P weighting probably comes from NDX stocks, so there is a significant
overlap).
We might define NDX (the tech. stocks) as a good value relative to the
SPX when the ratio of NDX to SPX reaches an "attractive" level. Said
differently: "At what level would we feel comfortable shorting the
broader market and going long tech.?"
The following table illustrates the historic ranges of the ratio
of NDX to SPX, by year, using monthly closes:
Ratio of NDX to SPX
Year Ave. Min. Max.
1985 0.62 0.61 0.62
1986 0.62 0.59 0.66
1987 0.62 0.58 0.65
1988 0.65 0.62 0.69
1989 0.64 0.62 0.67
1990 0.62 0.57 0.67
1991 0.70 0.61 0.76
1992 0.78 0.72 0.84
1993 0.81 0.77 0.84
1994 0.85 0.81 0.89
1995 0.95 0.86 1.03
1996 1.01 0.93 1.10
1997 1.12 1.05 1.19
1998 1.18 1.02 1.34
1999 1.72 1.49 2.14
2000 2.55 1.91 3.12
2001 1.67 1.47 1.90
As you can see, in the 1985-1990 period, the ratio of NDX to SPX
stayed in a tight range, roughly between 0.57 and 0.69. In the
1991-1998 period, the ratio moved up steadily, from a low of
0.61 to a high of 1.34. Then, in 1999 to March-2000, the ratio
uncorked from 1.49 to 3.12, essentially making the same
magnitude move in 1.25 years that had previously taken 7 years.
In the past year, from April-2000 to March-2001, the ratio has
retraced most of that move, to the current level of about 1.5.
The question remains: What is the level of this ratio that signals
relative value for the NDX?
The first chart shows the historic values of the ratio of NDX to SPX,
along with a projection. The projection uses decline rates for the
NDX and SPX seen over the past year; -5.93% per month for NDX and -1.36%
per month for SPX. In that chart, two scenarios appear likely:
1) In late 2001, the ratio hits about the 1.0 level for which there
is some precedent that this is a decent value level for the NDX.
However, in this scenario, the upside out-performance of the NDX
relative to SPX may be limited (look at 1996,97,98 for comparisons),
2) The wheels come off, and NDX tanks down to relative ratio levels
of 0.6-0.70 seen in the 1985-1991 time period. Using the 1990 recession
level as a guideline, then we might see the ratio head below 0.60
at the extreme.
The following table shows the projections:
NDX and SPX Projections
using rate of decline over past 12 months
Month Ratio NDX SPX
2001/03 1.47 1813 1233 03/09/2001 - actual
2001/04 1.40 1704 1216
2001/05 1.34 1603 1199
2001/06 1.28 1508 1183
2001/07 1.22 1419 1167
2001/08 1.16 1335 1151
2001/09 1.11 1256 1135
2001/11 1.05 1181 1120
2001/12 1.01 1111 1104 Scenario 1: NDX = 1111 at Nov-2001 close
2002/01 0.96 1045 1089 (-31% drop from current levels, -75% from the top)
2002/02 0.91 983 1075
2002/03 0.87 925 1060
2002/04 0.83 870 1046
2002/05 0.79 818 1031
2002/06 0.76 770 1017
2002/07 0.72 724 1004
2002/08 0.69 681 990
2002/09 0.66 641 976
2002/10 0.63 603 963
2002/11 0.60 567 950
2002/12 0.57 534 937 Scenario 2: NDX = 534 at Nov-2002 close
(-71% from current levels, -88% from the top)
In both scenarios, NDX still has a lot further to fall to reach
more typical valuation levels. Right now, Scenario 1, a low in the
1000 to 1100 range in late 2001, seems about twice as likely (to me)
as scenario 2. I say this, because I don't think the shine will
come completely off tech. stocks, and at par value to the S&P,
NDX may look pretty good. Still, there is support for Scenario 2
on a very long term trend basis, and using relative P/E valuations.
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