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.

In addition to the speculative names, semiconductors and biotechnology, two (2) leading industry groups from 1999, were not broadly responding to the upside that began in late May 2000.

For example, some semis with strong sales and earnings growth, looked just like the speculative names as they failed to get up off the mat during the NASDAQ's May-September 2000 Rally (see chart 9, page 11).

Other semis were failing base breakouts (BRCM, ADI, etc.) and causing trouble after initially rallying with the market.

Intel (INTC), an important technology stock, issued an earnings warning after the market closed on September 21, 2000.

This didn't help technology stocks the next day.

Many people assured that Intel's problems would only impact PC (personal computer) companies (Apple, Dell, Gateway, etc.), but they were incorrect.

Some even went so far as to recommend buying the chip giant (Intel) after it plunged on Friday, September 22, 2000.

The main problem with their advice was that it was not reflective of the market (majority opinion).

Do you remember what I said about stock research?

"Stock research is not directly about individual opinion, it's primarily about the market's opinion."

What did the market think about Intel?

It wasn't too good if you bought Intel's stock after its warning in September 2000.

Why?

Intel fell another 73% after it gapped down on September 22, 2000.

This example (INTC) shows why it's critical to listen to the market's opinion before listening to anyone.

The market (majority opinion) was selling Intel hard and this was very important information to know.

Technically, Intel undercut the low of its base, which was a price level well below its 40 Week EMA when it warned in late September 2000 (see chart 10, page 12).

Therefore, Intel wasn't even in a good technical position for an investment.

In the end and just like the speculative names, the large cap tech stocks were a victim of intense institutional selling as the bear market continued in September 2000.

William O'Neil (famous stock investor and founder of Investor's Business Daily) once said, "When they raid the house, they usually get everyone."

This was very true in late 2000 as the large cap tech stocks rolled over just like the speculative names had earlier.

Lastly, Qualcomm (QCOM), a big market leader since early '99, failed to even muster a rally during the NASDAQ's late May-early September run higher (see chart 11, page 13).

This was very telling and another sign that technology stocks were in trouble.

What do the Intel and Qualcomm examples teach us?

Before buying a stock, it makes a lot of sense to look at a stock chart to get the market's opinion.

Is the stock healthy, unhealthy or neutral?

This information is free and I encourage you to check a basic stock chart before diving into the market.

Using a stock chart will help you protect your money in the market because you will get an unbiased view of your stock of interest from the most important judge (the market).

If the market doesn't like your stock, you should probably pass on it for an investment.

Group 3:  Technology Stocks that Broke Out of Bases (after the May 2000 Bottom)

The market (NASDAQ) rallied 40% off the May 2000 Bottom.

Because of this uptrend, many stocks that were already sitting in mature bases and ready to lead experienced large gains.

This was positive for the market because stock leadership was still coming from technology.

Keithley Instruments (KEI-no longer trading) broke out of a base on June 2, 2000 and vaulted 215% in just over a month.  It topped in July 2000 and slid much lower as the bear market resurfaced in the Fall of 2000.

Newport Corporation (NEWP) broke out of a deep base (-65%) on the same day as KEI (see chart 12, page 14).  Newport and Keithley Instruments were from the same industry group (group leadership).  Newport topped in late September 2000 after a 200% gain.

SDL Incorporated (SDLI-no longer trading), an institutional growth leader focused on fiber optic products, also broke out of a base in June 2000 and advanced 110% before topping in July 2000.

Fiber optics was a very hot area of technology during the '98-'00 Technology Boom.

SDL along with JDS-Uniphase (JDSU) were two of the most coveted fiber optic stocks by fund managers.

The Internet needed more bandwidth and fiber optic products were sold as the answer.

The topping of both stocks (and other Fiber Optic Stocks) was not a good sign for technology in the Fall of 2000.

This became even clearer when Nortel Networks (NT-no longer trading), a leading fiber optic stock, posted weak sales growth in late October 2000 and plunged 30% in one day.

Nortel's bearish revenue report helped start a major decline in some of the leading tech stocks that broke out of bases after the May 2000 Bottom.

This put the final nail in the coffin of most technology stocks after they held up reasonably well in September despite a weak stock market (see charts 13-19, pages 15-21).

The market spoke loudly and those who listened to the market (used stock charts) saw technology stocks breakdown in front of their eyes.

As it turned out, there was a glut of fiber optic equipment in the early part of the decade after a huge supply increase was deemed necessary to meet the Internet's growth and the Y2K concerns.

Homebuilding Stocks

Before I switch to September 2010, I wanted to quickly mention the Homebuilders.

The homebuilders started their 5+ year advance during the Summer of 2000 when technology was on its last leg (see chart 20, page 22).

In early 2001, the Federal Reserve was slashing interest rates due to the stock market collapse and the seeds were planted for the housing mania later on in the decade.

I remember many people saying, "Don't fight the Fed" when they started cutting interest rates in 2001.

This statement was left over from the prior secular bull market, but there was one major problem with it in 2000, the market was entering a secular bear market.

Apparently, you were supposed to buy stocks because the Fed's actions were going to save the stock market/economy.

That didn't happen for a long time (market bottom in October 2002 and upside in April/May 2003) and is all the more reason to check the market's opinion before listening to conventional wisdom.

If you bought technology stocks after hearing this common Wall Street phrase ("Don't fight the Fed"), you lost money because the NASDAQ fell another 54% after the first interest rate cut.

Because of the falling interest rates during the tech downturn, home affordability increased (mortgage rates fell) and more people were drawn into home ownership and away from stocks.

Sometimes certain stock sectors can lead despite a bear market.  In late 2000, this was certainly the case with the Homebuilders.

<< Previous | Next >>