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Nasdaq 2000 here we come?
It's possible, but not likely, for tech stocks to continue rallying at such a strong pace.
July 1, 2003: 8:27 AM EDT
By Paul R. La Monica, CNN/Money Senior Writer

NEW YORK (CNN/Money) - Will investors be ready to bust out their Nasdaq 2000 hats and buttons by the end of 2003?

The Nasdaq would need to gain 23 percent in the next six months to get back to 2000, following a 21.7 percent jump in the first half of the year.

The last time the tech-heavy barometer closed above 2000 was on Jan. 15, 2002.

To be sure it's a lofty goal -- it would mean the Nasdaq posted an annual return of more than 50 percent. But momentum is momentum, and some think Nasdaq 2K doable.

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Todd Campbell, president of Watchdog Research, an independent research firm, is one. "Never underestimate the mania of the market," Campbell said. "It's absolutely possible."

Campbell added that as long as techs continue to post relatively strong results, then there could be more upside for the Nasdaq because he thinks there still are plenty of investors who have been waiting for stronger signs of a recovery and have yet to jump back in.

But will the fundamentals be there?

Techs have been the market's best performers year-to-date on renewed hopes that a pickup in the economy will lead to increased levels of information technology spending by businesses, and hence big gains in earnings for tech companies. More recently, a pickup in consolidation in the sector has helped as well.

The market has high expectations for techs in the second half of the year. According to First Call, analysts are projecting a 54 percent earnings increase in the third quarter from a year ago and a 26 percent gain in the fourth quarter.

Problem is, there still are a lot of doubts about whether or not the economy will improve enough to validate the current prices of technology stocks. The S&P Tech Sector trades at 32.5 times 2003 earnings estimates.

"The economy is not in a position to sustain the kind of upside that bulls require to justify their stance," said Richard Williams, strategist for Summit Analytic Partners, a boutique research firm specializing in software stocks. "Stocks are tremendously overvalued, based on what I can see, and it's hard to get too excited about upside potential."

Other factors could lead to a second half pullback in techs as well. Barry Ritholtz, chief market strategist for Maxim Group, a New York-based asset management firm, said that many of the sector's gains so far have been fueled by short sellers covering their bets (short interest hit a record high in June) and technical reasons for buying.

You're the top!
The 10 best performing tech and telecom stocks in the S&P 500.
CompanyPrice change YTD*
Veritas Software 82.9%
Citrix Systems68%
* as of June 27

In addition, he said, fund managers are latching on to momentum stocks in order to increase their returns. Some of the biggest winners in the tech sector during the first half of the year were not companies with fantastic fundamentals but beaten down companies that are simply bouncing off lows. Such stocks include Avaya, Corning, PMC-Sierra and Lucent Technologies.

Ritholtz thinks that the tech sector could experience a 20 to 30 percent drop before going on to a longer-term recovery. "If tech stocks keep going up with no pause, they will get insanely frothy."

And regardless of whether the Nasdaq gets back to 2000 by the end of the year, that's still small consolation for most tech investors since that still would be more than 60 percent below the composite's all time peak set in March 2000.

"People read too much into rallies. All you're doing is alleviating some of the agony that investors have been through the past three years," Ritholtz said.  Top of page

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