All good things must come to an end, especially in the technology sector.
According to David L. Babson & Co., Boston, technology cycles tend to end suddenly, with little warning, causing high-flying stocks to nosedive.
During the past 35 years, technology issues usually have fallen at least twice as much as the market averages.
The average decline in the seven down periods between 1961 and 1990 was 55% for technology stocks vs. 27% for the Standard & Poor's 500 Stock Index, Babson's research shows.
And those numbers applied to the larger, higher quality issues. The weaker, speculative stocks fell even more - some by as much as 100% as they slumped into bankruptcy when technological advances passed them by.
"Highly popular stock groups are always vulnerable to even slight disappointment," the report said.
For instance, three years ago, biotech stocks dropped 50% as regulatory new product approvals failed to meet investor expectations and the political environment for healthcare looked grim. Thirteen years ago, gold mining shares plummeted 85% when high inflation suddenly abated.
The report said many technology stocks don't look overpriced on a price-earnings ratio basis. It warned earnings estimates are very optimistic, profit margins are near peak levels and price-to-book ratios are high.
"So the stocks don't have valuations that will support them when the industry environment becomes less favorable," the report said.