Just 7% from the bubble peak, Nasdaq investors are losing nerve

[NEW YORK] After waiting 15 years to pull back toward even, technology investors suddenly can't handle success.

They yanked US$6.8 billion from the biggest exchange-traded fund tracking the Nasdaq 100 Index in December and January, the most for any two months on record. Big speculators like hedge funds have cut their holdings of futures tracking the gauge to the lowest since 2012.

Fear of heights is setting in after a 320 per cent rally brought the bellwether index for dot-com excess within 7 per cent of its all-time high, reached March 27, 2000. Investors are bailing out as a 16 per cent increase in the dollar crimps results for companies that tally more overseas sales than any other industry.

"Once you get past Apple, sentiment remains skeptical toward a lot of companies," said Dan Veru, who helps oversee US$5 billion as chief investment officer at Fort Lee, New Jersey- based Palisade Capital Management. "Investors just remember how many of the business models from the dot-com boom failed." Anxiety is building after Microsoft Corp. cited dollar strength for a sales shortfall and International Business Machines Corp. warned the currency volatility may shave revenue growth by 5 to 6 percentage points. Among Nasdaq 100 companies that have reported fourth-quarter results, 45 per cent trailed analysts' sales forecasts, data compiled by Bloomberg show.

Computer and software makers in the Standard & Poor's 500 Index get 57 per cent of revenue outside the US, according to estimates from Strategas Research Partners. All major currencies have declined against the dollar in the past 12 months, with the Bloomberg Dollar Spot Index hitting a decade high.

"Currency concerns are a thing of the present," John Manley, who helps oversee about US$233 billion as chief equity strategist for Wells Fargo Funds Management in New York, said in a phone interview. "The fundamentals look good but you're losing some stuff with the dollar and that makes people nervous." Technology companies have posted some of the biggest gains in the six-year-old US bull market and that's pushing out valuations. After rising 270 per cent since March 2009, the Philadelphia Semiconductor Index trades at 3.6 times sales, near the highest level since 2007.

A 456 per cent surge in the Nasdaq Biotechnology Index has driven its price-sales ratio to an 11-year high of 9.6. Among the index's 151 companies, about two-thirds are forecast to be unprofitable this year, analysts' estimates compiled by Bloomberg show.

"People have moved to a place of being a realist," Daniel Genter, who oversees about US$4.8 billion as chief executive officer at Los Angeles-based RNC Genter Capital Management, said in a phone interview. "Technology has proven itself that it's going to be here to stay. People look at it like, 'Innovations are intriguing, but eventually you need to make real money.'" The Powershares QQQ Trust, tracking the Nasdaq 100, has lost US$2.6 billion this year, following withdrawals of US$3.8 billion in December.

In Nasdaq 100 e-mini futures, net long positions last month fell below 20,000 for the first time since the end of 2012, according to Commodity Futures Trading Commission data compiled by Bloomberg. While holdings rose to 30,148 last week, it's less than half the average in the previous three years.

Rallies in stocks from Apple Inc to Netflix Inc and Amazon.com Inc have driven the Nasdaq 100 toward the ninth straight quarterly gain, the longest since 2000. While it's tempting to draw parallels to the dot-com bubble, valuations are nothing like they were then, according to Robert Stimpson, a fund manager at Oak Associates Ltd in Akron, Ohio.

The Nasdaq gauge trades at 3 times sales, less than half where it was during Internet mania. Computer and software companies in the S&P 500 are forecast to increase earnings by 16 per cent this year, more than any other group.

"The earnings power is significant, whereas it was questionable 15 years ago," Mr Stimpson, whose firm manages about US$900 million, said by phone. "I don't think the underlying business models or the landscape is changing at all. It's simply with the move in the dollar, you'll get some additional volatility."

Some of the biggest Nasdaq winners are starting to lose their momentum. Vertex Pharmaceuticals Inc, a biotech company that rallied 60 per cent in 2014, is down 4.3 per cent this year. Chipmakers such as Micron Technology Inc and SanDisk Corp. have dropped at least 9 per cent among the biggest losers in the Nasdaq 100 after rallying more than 39 per cent in the previous 12 months.

Momentum or currency, the rising stock volatility associated with them is putting Federated Investors Inc's Matt Kaufler on alert. The Nasdaq 100 has moved an average 0.9 percent each day in 2015, compared with 0.67 per cent last year.

"I'm a little anxious about it, you can't help it," Kaufler, the Rochester, New York-based portfolio manager of Federated's Clover Value Fund, said in a phone interview. "Capital could be coming out of the sector just based on concerns about what the strong dollar means," he said. "To me, it's an over-rated issue, but for some people, it's an obsessive issue."



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