COMMENTARY -- The January effect was a beautiful thing for the tech sector. The Nasdaq composite index surged more than 12 percent. Investors even found a bright side to gloomy earnings reports.
The much-ballyhooed January effect is a Wall Street phenomenon where retirement money floods the market and investors go on a buying spree. In recent years, the January effect came in December as investors bought ahead of the bounce.
This year, the January effect actually happened in the month it was supposed to. Aided by bargain hunters and two interest rate cuts by the Federal Reserve, technology stocks rallied. Even momentum was back in favor.
The psychology game also played a role. In January, investors took a "glass half full" view of the world. Since everyone knew the fourth quarter would stink, investors rightly focused on the outlook for the tech sector. On nearly every conference call by a tech company, officials said they expected a second-half rebound.
Investors gobbled it up.
However, not everyone is so upbeat. Bill Schaff, fund manager for the Berger Information Technology Fund, said there may be a February effect.
"We had a nice run in January on earnings, but investors will soon focus on economic data," said Schaff. "There'll be a February sell-off. We'll lose some, if not all, of January's gains."
Schaff paints the following scenario. As investors focus on economic data, they'll inevitably start to wonder why the Federal Reserve is cutting interest rates so aggressively. Most analysts agree the economy is slowing, but what happens if business doesn't stabilize in March or April? After all, it takes at least nine months for an interest rate cut to boost the economy.
"The current run was based on the theory that things will get better in the second half, July 1," he said. "I don't think it'll happen that soon."
Chuck Hill, director of research at earnings tracking firm First Call, said investors have already discounted a sluggish first half. However, Hill said investors could start worrying about the third quarter. "I don't think the market has discounted the third quarter," he said.
Hill noted that analysts have already slashed tech companies' earnings targets for the third quarter from growth of 11 percent to 2 percent.
There's a good reason for those lowered expectations. Many companies--Lycos, National Semiconductor and a bunch of others--have said they can't predict what'll happen past the first quarter. This second-half rebound theory is pretty vague. How can investors bet on a second-half rebound when only a few companies can give concrete projections for 2001?
Schaff said he's on the defensive. Schaff said he's holding IBM (NYSE: IBM), which showed in its most recent earnings report that it can handle a slowdown, BMC Software (Nasdaq: BMCS) and Computer Associates (NYSE: CA), two companies that will ride shotgun with IBM's mainframe product cycle.
Schaff is also still a fan of BEA Systems (Nasdaq: BEAS), i2 Technologies (Nasdaq: ITWO) and Siebel Systems (Nasdaq: SEBL). Schaff classifies those stocks as both "offensive and defensive." Those e-business software vendors boost return on investment for their customers. "Customers will buy that stuff because it generates a return in good times or bad," he said.TDAIN
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