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After the huge drop of Nasdaq since March 2000, everyone wants to know when it will REALLY be safe to go into the tech waters again. There's no sure-fire signal, but here are a few metrics we suggest you consider before making your own decision.
Our Tech Stock ‘Safe’ Signal is designed to indicate when it is finally, truly safe to bet on the future of technology companies. Our ‘safe’ signal requires at least 20% (1 out of 5, or 10 out of 50) of the top 50 tech companies to signal acceleration of both revenue and earnings. Expect one or two quarters to elapse from the time of the first indications of an upturn and the return of solid growth. The theory is that the stock market should begin a sustainable advance four to six months in advance of the return of strong growth. If you want to get the early stock market gains, you'll have to jump the gun and get in before our signal triggers. But if you do, you have to be prepared for some significant volatility and possibly some big losses. You have to decide for yourself whether you want safety in the short run or higher potential returns in the long run.
When we say "acceleration of both revenue and earnings", we mean that it's insufficient for companies to grow earnings simply by cuttings costs and laying workers off. We need to see some significant top-line revenue growth and statements by management that they are actually seeing a pickup in demand.
Consult our daily column for the current reading of this indicator.
Here are some other 'indications' to watch for...
Since so many tech companies are outsourcing manufacturing now, we should be able to sense when tech business is starting to ramp up as the tech manufacturers start ordering more from their contract manufacturers.
If media companies are starting to report significant increases in advertising, that's a signal the overall economy is looking better. Tech companies don't exactly track the overall economy, but most tech companies do depend on the economy growing at a healthy rate. Talk of a recession is not a good sign. AOL and Yahoo depend significantly on ad revenues.
The manufacturing may be a small portion of the overall economy, but it is an important driver and has significant spillover effects for the rest of the economy. Manufacturing is also increasingly dependent on the use of technology for advanced processes, optimization of production, management of inventory, and innovation. The tech sector is now large enough that advances and declines in the manufacturing sector will tend to be one of the main drivers of the tech sector.
Updated: February 05, 2006 08:00:51 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology