Bernard Tan: Is TECH back?
Comment of the Day

February 10 2012

Commentary by David Fuller

Bernard Tan: Is TECH back?

My thanks to the author for his latest and very interesting report. I have a lot of time for Bernard Tan because he is one of that small group of independent analysts - I will call them Friends of Fullermoney - whose reports we like to publish because they are highly experienced and genuinely free press. Here is the opening:
The Nasdaq peaked in Mar 2000, almost 12 years ago. For the longest time, observers have been fond of comparing the Nasdaq with the Nikkei, which peaked in Dec 1989. And for quite a while now, the Nasdaq index post-Mar 2000 has mirrored the movements of the Nikkei post-Dec 1989.

However, as can be seen from the attached chart, Nasdaq's mirroring of the Nikkei broke down in 3Q, 2010. Since then, a sharp divergence in behaviour can be seen. The white line is Nasdaq and green line is Nikkei, with the time axis adjusted so that the two peaks coincide.

David Fuller's view For the record, Fullermoney is not a fan of historic overlay charts, which are cherished by some analysts. All big bubbles and their medium-term aftermath look similar because they are caused by manias. It is this behavioural factor - panic-in-and-panic-out - which they share.

A once-bitten-twice-shy aftermath leads to a lengthy convalescence. Thereafter, markets go their separate ways, subject to their own fundamental factors which may occasionally be similar but are usually very different. This is certainly true of tech which is experiencing exponential developmental progress and sometimes earnings to match, despite the intense competition and risk of early obsolescence. In contrast, Japan, for all its engineering skills seems to have been caught in a time warp. An ageing population has also sapped some of its former vitality.

Fullermoney included technology among its secular themes approximately three years ago and it is a sector leader today. Interestingly, there is a dearth of attractive technology funds today, which is testimony to how long the sector was out of favour. Eoin and I had a quick look at them earlier today and the US Nasdaq 100 tracker, PowerShares QQQ (weekly & daily) seems the best of the bunch, albeit temporarily overbought. I would also be careful because Apple (weekly & daily) is accelerating above its 200-day MA on hopes that a significant dividend will be introduced. This type of price action quickly becomes climactic.

On a medium to longer-term basis we think tech will remain among the most promising sectors, not least because of the valuation comparisons mentioned by Bernard Tan and other bull points.

Lastly, I have created an historic overlay chart of the Nasdaq 100 and the Nikkei dating back to 1985 and without the time lag shown in Bernard Tan's graphic. Japan, while often a serial underperformer in recent years, has nevertheless participated in global stock market rallies. With a cyclical bull trend evident in equities today, albeit temporarily overbought, Japan should have some catch-up potential now that its banks are beginning to perform (see Eoin's review of Japan posted yesterday).

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