How to Approach September in the Stock Market (2000 vs. 2010)

Note:  This lesson is meant to help you learn from the market and does not serve as investment advice for any specific group or individual.  For more information, please read the HSR Terms of Use.

Group 1:  Institutional Quality Tech Stocks (off the May 2000 Bottom)

Many market leaders that ran up sharply during 1999 and early 2000, fell rapidly during the March-May 2000 period in the NASDAQ.

During this time, the NASDAQ dropped 40%, but many high-flying tech stocks fell more than the market.

I2 Technologies (ITWO-no longer trading), a supply chain management software leader, fell 70% before mounting a rally in the Summer of 2000.

I2 never regained its leadership status like it had in the Fall of 1999 (broke out of a base ahead of the market in early October) despite a 185% rally off its April 2000 bottom.

Other liquid techs with strong sales and earnings growth (institutional quality) were finding support at or near their 40 Week EMA after big declines.

However, the main problem with these stocks was that they were building immature bases at a time when the market started its big rally in late May 2000.

In reality, they were not ready to break out and lead the market as they did before the NASDAQ's March 2000 Top.

As mentioned, this is not always bad because other stocks can lead a rally higher, but it was important to recognize given the narrow market leadership.

The simple fact was that many former growth leaders (BRCM, PMCS, TQNT, VRSN, JDSU, etc.) were stuck climbing back up to their old highs instead of leading the market rally out of bases.

This reduced the technology stock leadership from an important group (Institutional Quality Tech Stocks) off the May 2000 low.

As an example, in late May 2000, PMC-Sierra (PMCS) bounced off its 40 Week EMA for the first time since crossing it in October 1998.

PMC-Sierra then spent most of the summer chewing through resistance and climbing up the right-hand side of its base instead of leading the market like it had earlier in 2000 (see chart 1, page 3).

Unfortunately, after their big runs, technical leadership (base breakout and trend higher) was a tall order to fill for many beaten down tech stocks during the latter part of 2000.

Many techs rallied well over 100% from the May 2000 low and asking them to lead again was a lot to expect.

PMC-Sierra eventually failed its base breakout in September 2000 and then rolled over with the market later that year (see chart 2, page 4).

Former tech leader, Ariba (ARBA-no longer trading), broke out of a base in August 2000, but then failed its breakout just like PMCS (see chart 3, page 5).

Ariba had already rallied 170% before it broke out of a base in August 2000.

This was a big gain from its low and that was the problem with many technology stocks.

As specified earlier, because of the steep sell off during the initial decline in the NASDAQ (March-May 2000), many former stock leaders were running up a hill during the Summer of 2000.

This detail was worth paying attention to for market direction.

I remember buying JDS-Uniphase (JDSU) and Network Appliance (NTAP) during the Summer/Fall of 2000.

I missed the whole tech rally because I just learned about using charts to read the market in late 1999.

Would I get in on the stock market gains?

No, I was much too late and inexperienced, but I managed to cut my losses after my stocks failed to work.

That was definitely the correct move to make.

During the Technology Bear Market of 2000-2002, JDSU and NTAP fell 95%+ and are nowhere near their 2000 highs (13+ years later).

Cutting your losses and admitting you're wrong can save you from disastrous situations like the 2000-2002 Tech Bear Market.

If I was eager to get into stocks during the Summer/Fall of 2000, wouldn't most stock investors feel the same way?

With technology already on everyone's radar, combined with stocks that have run up over 100% off the bottom of deep bases, it was hard to be confident in the leadership of institutional quality technology stocks.

Group 2:  Speculative Technology Stocks (off the May 2000 Bottom)

Speculative stocks tend to go up a lot when the market is hot, but they can fall harder and faster than other stocks during market corrections.

Stocks with little to no earnings, but big sales growth were very popular investments during the NASDAQ's huge rally in late 1999 and early 2000.

To be clear, all stocks are speculative investments, but these stocks were the most speculative because they didn't have a history of profitability.

In addition, many speculative stocks were recent IPOs (Initial Public Offering).

New IPOs often outperform the market when speculation is alive and well in a bull market.

In 1999, technology IPOs were in heavy demand by stock investors.

Any company positioned towards the Internet was rapidly bid up by the market.

As an example, Commerce One (CMRC-no longer trading), a technology IPO focused on the B2B (Business-to-Business) sector, came public in June 1999 and advanced 1,275% by the end of 1999.

Commerce One then topped and fell 99% before declaring Chapter 11 bankruptcy protection in 2004.

In case you're wondering, this is relatively common when the market moves into a secular bear market.

Most stocks decline, but speculative names can fall much faster and some companies don't make it.

During the initial stage of a market correction, it's common for money to flow out of names that are more speculative and into large cap stocks because they appear safer/more insulated from an economic downturn.

This is exactly what happened to Commerce One and many other technology IPOs in 2000.

Large cap technology stocks like Oracle (ORCL), EMC (EMC), Corning (GLW), Nokia (NOK) and Sun Microsystems (SUNW-no longer trading) didn't fall as hard as the speculative names during the initial decline in the NASDAQ (see charts 4-7, pages 6-9).

Speculative names like Infospace.com (BCOR), BroadVision (BVSN), Vignette (VIGN-no longer trading), Vertical Net (VNET-no longer trading) and Inktomi (INKT-no longer trading) lost most of their market leadership during the NASDAQ's dive that started in March 2000.

More importantly, in September 2000, many speculative technology stocks were not forming proper bases.

A base is a precursor of market leadership and this was not a good sign for the market.

In fact, many speculative names failed to rally very much during the NASDAQ's 40% surge in the Summer of 2000, a bearish divergence (see chart 8, page 10).

If they couldn't rally during a strong market, how would they fare if the market resumed its decline?

Without question, the NASDAQ rally was weaker because fewer technology stocks were leading the market's move higher that began in late May 2000.

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