Individual investors charged into technology stocks yesterday, driving the Nasdaq composite index to its third-largest point gain ever.
Following days of roller-coaster volatility, the rally erased the effects of Monday’s giant sell-off.
But deep-pocketed institutional investors remain on the sidelines, suggesting that the volatility – and the bear market – are not quite over yet.
Despite the 100-point or 200-point moves up or down in recent days, the Nasdaq stands about where it was trading nine sessions ago. Or, for the investor with a longer-term horizon, the Nasdaq is trading just about where it was trading in early December.
Yesterday, the technology-packed Nasdaq rocketed 228.75, or 6.57 percent, to 3,711.23.
Other major market indexes also rallied. The Dow Jones Industrial Average jumped 218.72, or 2 percent, to 11,124.82, while the S&P 500 Index rose 47.28, its third-largest point gain ever, to 1,477.14.
Much of the trading was conducted in increments of less than 1,000 shares – evidence that the rally was due to individual investors buying on the dips.
Most Wall Street pros said they’re still on the sidelines, because they don’t yet believe the Nasdaq has hit bottom.
“Despite our conviction that the broad equity market is attractively valued, we think it makes sense to reduce our equity risk somewhat, mostly because we think the correction for technology stocks still has a ways further to go,” said Tom McManus, strategist for Bank of America Securities.
He has reduced the recommended equity weighting in his model portfolio from 80 to 75 percent.
In recent weeks, top strategists at Goldman Sachs and PaineWebber also told their clients to hold less of their investment portfolio in stocks.
That suggests that individual investors are the only ones supporting the rally, while deep-pocketed institutional investors are sitting on the sidelines. Until that institutional money comes into the market, the downward volatility will continue.
“The long-expected shakeout of the Internet companies is happening, and you don’t want to be the one still holding the shares when they file for bankruptcy,” said Peter Cohan, head of Cohan & Associates, which specializes in technology stocks.
Just yesterday, Drkoop.com, the popular health site involving the former surgeon general of the United States, admitted that it would run out of cash within five months if it doesn’t get a big cash infusion from a buyer.
It is just one of hundreds of dot-coms that are running low on cash and may head into bankruptcy.
Cohan said he’s advising his clients to stick with the companies that are reporting healthy profit growth, and ignore the unprofitable Internet companies.