High-tech stocks have been enjoying a great party, lately. The Nasdaq composite has been up 2.8 percent for the week and 7 percent for the year. Popular stocks have fared even better for the year: Apple (NASDAQ:AAPL) is up close to 12 percent; Salesforce.com (CRM) up 10 percent; Microsoft (MSFT) up 9 percent; Oracle (ORCL) 15 percent, Xilinx (NASDAQ:XLNX) 18 percent, and Netflix (NFLX) 45 percent!
We do hate to spoil this party, but we do believe that high-tech stocks are ripe for a correction for the following reasons:
First, part of the run-up should be attributed to the "January Effect," which usually fades by the end of the month.
Second, another part of the run-up is attributed to earnings reports that beat earnings estimates. The problem, however, is that earnings estimates were cut shortly before the earnings reports, e.g., Xilinx and Intel (INTC).
Third, Q4 earnings did get a boost from favorable capital depreciation rules that did expire at the end of the year.
Fourth, high-tech earnings are sensitive to economic conditions that have been deteriorating in several parts of the world, especially in Europe where companies like Oracle have a big presence.
Fifth, for quite some time high-tech companies have been benefiting from a weak dollar. Recently, the dollar is getting stronger, not weaker, hurting high-tech earnings, as confirmed by Google's (GOOG) Q4 report.
Sixth, certain segments of the high-tech industry become crowded and saturated fueling price wars, e.g., the iPads wars, where Amazon's Fire has put downward pressure on mobile devices.
Seven, Nasdaq is approaching the 2800-mark, where it may find significant resistance.
What should investors do? Take some profits, raise some cash to re-establish positions in a pullback. Stocks rarely go up on a straight line.