"Has Nasdaq mad-bull disease leaped the species barrier?" wonders Donald G. M. Coxe.
The chairman and chief strategist for Harris Investment Management Inc., Chicago, worries that the plunge of Nasdaq, down 62% from its peak, is infecting the broader market and could result in an historic bear market.
The Standard & Poor's 500 stock index is down 24% from its peak, "not because of a collapse of old-economy stocks, but because of the gigantic exposure it had to technology stocks, he said." But in recent weeks the S&P 500 "has been hurt by stocks outside technology."
Still, it isn't an all-out bear market yet, according to Mr. Coxe's classical view. The Dow Jones industrial average's recent plunge to close at 9389.48, or almost 20% below its peak, does brush bear market territory, he conceded. But one thing now "preventing a truly historic bear market call is a confirming or similar fall in the Dow Jones transportation average," which also would have to fall 20%, based on his classical view. The transportation average currently is down about 16% from its peak, he said.
The Dow Jones industrials "had held up well until recently, and then suddenly caved," he said. But even a transport average fall would signal an odd bear market, he said, because two other key indicators are still very positive. The U.S. dollar has been strengthening, and financial stocks have been outperforming the market, he noted.
Consumer sentiment has held up because of the huge returns earned on index funds during the bull market, still large despite some "playing" in technology stocks. But if those profits start to melt away, he said, consumer pessimism could drive the economy down.
He recommends "pension funds should sit tight" with their equity allocations. "It may be a case it's too late to sell."
Mr. Coxe laments the excesses of Nasdaq and technology investors are contaminating the rest of the market. If an all-out bear market comes, "everybody would be collectively punished." It would be too bad if there is not an ark, he said, for those investors who have valued stocks on a rational decision-making basis.