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Harry S. Dent Jr., president of portfolio-analysis firm H.S. Dent Advisors, was one of the bulliest of the bulls in 1999. In his books The Roaring 2000s and The Roaring 2000s Investor, he posits the theory that demographics are the key driver behind the recent period of unprecedented U.S. economic expansion. So long as the baby boomers are in their peak spending years, the economy will roar along, a trend that won't peter out before 2008, according to Dent.
Nonetheless, he has recently revealed a bearish side when it comes to the short-term performance of the Nasdaq. Business Week Online correspondent Margaret Popper recently spoke to Dent about his short-term forecast for the Nasdaq. Here are edited excerpts of that conversation:
Q: Have we seen the end of Nasdaq corrections for a while?
A: This [Nasdaq at 3200] could have been a bottom. We would say that Nasdaq is pretty much at fair value between 3100 and 3400. But we suspect that the market's going to bounce here and then fail again. The Nasdaq went up to an extreme for the first time in the last decade. It has tested the midpoint of its channel, and it's important that it hold here. If the market turns around and fails one more time and breaks below 3,100, it's probably going to fall substantially.
But it may hold here. It has had what would be a normal correction from an extreme run. Tech stocks are down almost 40% off their highs. So there have been some real corrections and some good value created. But you still look at real valuations and say, "Gosh, I don't know." I would give the chances greater than 50% that this is going to fail.
Q: What would give you confidence that the market slide is over?
A: If the Dow were to break 10,900 or the S&P were to top 1450, that would say to us we've probably seen the bottom. If the Nasdaq could get back over 3700, that might be enough strength. But between now and then, we still think it's too tricky. [In] other corrections, we saw the market correcting but semiconductors [or some other group of stocks] leading us out of the correction. We saw some strength somewhere that looked real. We haven't seen that yet [in this correction]. We think the odds favor this thing's not over.
Q: Should investors think about buying up stocks on the cheap?
A: We don't think this is the time to step in. We'd like to see some stronger signals. If we really see the market hold up here and there's some volume, you might be buying 5% or 8% off the bottom. But better to buy there. Who wants to buy at a market bounce to 3600 and then watch it go to 2500?
If we're going to see further weakness, we're going to see it in June. This rally probably won't last more than a couple of weeks, if it's going to fail. It's just kind of a wait-and-see period for about two to four weeks.
Q: You're less bullish on the market than you were after the market's first drop in March. What happened?
A: Originally we called this a correction. We predicted that the market would go to about 3700 -- and it did first bounce strongly from there. But when it started failing again, we said, "Well, let's watch this a little more." Normally, the market will have a climax of selling, like it did in April. [After that] it will bounce right back. And people say, "Yep, we're right back to the races."
Well, the fact that this one kept failing was not a good sign to us. So this is kind of the market's last chance. The bottom of the Nasdaq channel is all the way down around 2000. This is the scary side of it. But this wouldn't affect our long-term bullish forecast one bit.
Q: What's the Nasdaq's volatility?
A: The market is swinging 30% above or below its long-term trend line, or at about a 60% volatility rate. That's a lot. We tell people the gains in the Nasdaq have outpaced the Dow by almost 50%. But so has the potential volatility. So when you adjust for risk, the Nasdaq's no bargain. The Nasdaq will and has beaten the Dow over time. But you've got to be willing to pay the price that this downswing could be 60%.
Q: Where is the weakness in the Nasdaq?
A: The weakness is in the strongest quality leadership companies that still have some potential downside in their valuations. AOL is a great company -- but at 400 times earnings? AOL's price-to-earnings ratio should go to 40. Yahoo! is a great company, but it's at 400 earnings. These are companies that have earnings and substantial market shares, but they can't grow at 500% a year forever.
Q: Which sectors make the best investments in the current environment?
A: We always tell people to reallocate your portfolio when the market goes to extremes. We advised people in the first quarter of the year to reallocate out of tech and biotech, which had been the strongest sectors, and into multinationals, health care, and financial services. In mid-May, we told people to narrow down to multinationals and health care. Now, the financial [stocks] look like they're the last to roll over and, if we saw another wave down, could roll over substantially.
Q: Do you think we will continue to see strong earnings?
A: Yes. This is not an earnings problem. It's not an economic problem, although the Fed is slowing [the economy] some. It's just a valuation thing.
EDITED BY BETH BELTON
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