The Great Tech Wreck of 2008?

The high-tech companies of the S&P 500 last quarter turned in “the best performance of any sector in the market“.

Yet the sector that performed the best in this case has also of late been one of the hardest hit. The tech-heavy Nasdaq (QQQQ) has tumbled almost 14% since the first of the year, almost twice as much as the S&P 500 (SPY) (about 8.5%) or the Dow (DIA) (about 7%).

The tech sector was thought to be insulated from a local economic slowdown here in the U.S. since most of the earnings from tech come from overseas. However, events have proven otherwise.

It may well be that a local recession will have very little impact on tech earnings. However, the stocks themselves have been knocked hard.

If a selloff of this magnitude can happen when earnings are good, what’s going to happen when earnings actually become affected by the slowdown? Maybe tech is overvalued after all. In any case investors might want to brace for Round Two.

As early as last summer there were signs that the markets were starting to buckle. Several shudders have gone through the market since then, each one worse than the preceding. “We will have more rounds“.

Round Two may be around the corner. People have been increasing credit-card debt. “Round Two will be credit-card problems“.

Intel is in some ways emblematic of what has happened to tech. Intel’s (INTC) net income rose 51% last quarter, yet its shares sold off more than 12%.

Three is a magic number, so Google (GOOG) and Apple (AAPL) were similarly punished. You can prove anything with statistics.

Microsoft doesn’t count. Microsoft (MSFT) reported stellar results, but also offered strong guidance going forward, unlike most tech companies, which only posted strong results but offered softer guidance. Nevertheless, Microsoft shares waffled up and down the day after reporting. It seemed at the time “an ominous portent“.

Rationality did not return to the market until Cisco (CSCO) reported results for the December quarter. Cisco turned in some terrific numbers. However, it too offered some soft guidance going forward. Most everyone expected a tech wreck the next day – "stocks don’t trade on what companies have done, they trade on what they are going to do."

The tech wreck however never happened that day. Or it hasn’t happened yet. Knock on wood. Cisco finished up for the day.