4^th January, 2000.

For the last few days, I have been pondering over the trend in the software sector. The interest in this sector is ubiquitous. At the same time, the BSE sensex has been woeful in predicting the direction in which these stocks are headed. Though there is a consensus among the investing fraternity that these scrips are over priced, over valued, over bought etc. etc., no one seems to know where this rally will end.

The problem is more pronounced in India as we do not have a sector specific index that tracks the infotech sector alone. Like the NASDAQ composite or the NASDAQ 100 in the US. One way of circumventing the problem will be to study the NASDAQ composite index, which is more widely followed, to guide us about the investing strategy in infotech stocks. The increasing correlation between the prices of infotech stocks in India with those in the US makes this exercise even more worthwhile.

It is quite certain that, as and when the info. stocks in US react, there will be selling pressure world wide in this sector. Most analysts in the US too, agree that this sector is over heated. The Federal Reserve is monitoring the NASDAQ closely. It is likely to hike interest rates in its meeting scheduled for early February. The rate hike was postponed due to y2k concerns. Once it happens, the decrease of liquidity in the system will tell upon the stock prices. The second factor that can affect these stocks is the decrease in the last quarter earnings due to the end of the y2k problem.

That is the fundamental side. A look at the chart of the NASDAQ composite index shows us that a major decline was completed at 1419 (30-10-98). The third wave of the rally from 1419 took off at 2490 (13-08-99). A look at some of our infotech stocks show that the meteoric rise in these stocks began around the same time. This third wave in the NASDAQ has encompassed not just the stocks in US but info stocks across Europe and Asia. A straightforward target for this third wave is 4250. If there is an extension, a rise to 5336 is possible. After the completion of the third, there will be a fourth wave correction which can last for anywhere between two to six months. The weaker software stocks will be the worst hit in this decline. to quote Mr. Narayanmurthy, 'The men will be separated from the boys' (in the correction that ensues).

This correction can take the NASDAQ composite down by about 20%. But the long term trend will continue to be up for the whole of this year. The parabolic move being witnessed now is however, the most profitable part of the rally that began from 1419. Some sideways movement in the upper range is likely once the fourth wave starts.

The bottom line : There is no indication that the third wave has ended as yet. But it can end sometime in January. As far as long term investors in quality stocks are concerned, stay put. Those who are in the speculative infotech stocks, there could be danger ahead.

For the convenience of the subscribers of the Daily Wave Analyst, a supplement monitoring the NASDAQ and the developments in the US will be published once in a fortnight.

Published by Investwise. Phone : 022 577 9388, e-mail: [email protected]

More…

Exploring the correlation further: The Daily Wave Analyst, 18th January, 2000