Sure, the Internet stocks may very well be living one of history's great
bubbles, but the weird thing about this bubble is that
The Internet affects the way people trade stocks, and this has the
effect of more individuals coming online to invest in Internet and
technology stocks.
Put another way, as long as the number of Internet users grows, the
quality Internet stock prices are gonna grow as well. The institutional
investors know this. The smart individual investors know it, too. How
else to justify that today YHOO closed at 980 (adjusted for splits in
Sept 97 and August 98), AMZN closed at 645 (adjusted for split in June
98), and EBAY closed at 301 (it IPO'd on Sept 24, 1998)?
Since the supply of quality Internet stock shares available is extremely
low, the increasing demand for them (as more and more people get online)
drives their prices higher and higher -- effectively, these stocks are
no longer stocks, they are COMMODITIES. This trend will continue until
either the supply shoots way up, or the number of people entering the
Internet (for the purposes of trading online) stops growing, or the
unlikely happens and institutional investors pull their cash out. It
could very well be the case that none of these happens any time soon.
AMZN and YHOO are already S&P 500 companies, and AOL's price shot up
today (and will continue to shoot up tomorrow) as the Index controllers
have just used it to replace Woolworth on the S&P 500 (that resounding
yelp is the squeal of billions of dollars in S&P 500 Index funds buying
up AOL *and* incurring capital gains taxes for their index holders --
last week they had to do the same to add AMZN to the index).
This was articulated pretty well by Kevin Marder on CBS Marketwatch:
http://cbs.marketwatch.com/archive/19981221/news/current/marder.htx?source=blq/yhoo&dist=yhoo
I'll include it below because I like it so much...
> Internet Stocks: More to come
> By Kevin N. Marder, CBS MarketWatch
> Last Update: 3:15 PM ET Dec 21, 1998
>
> To review, I stated in this space Dec. 1 that "Monday's (Nov. 30) action
> indicates many Internets are "done" for the time being. That is,
> Monday's technical damage is so great that they won't be able to bounce
> right back without some time to mend. Technically, this repair process
> is known as basing, or trading sideways so as to ease their hugely
> overbought situation. I'm not ruling out further gains in Web stocks
> once their basebuilding process is complete, and not all Internet issues
> will trade exactly alike...it is this basing action that will be the key
> to knowing when the next advance in this group will occur."
>
> When a group enjoys a broad advance, peaks out, and pulls back, the
> market begins a weeding-out process -- the higher-quality names tend to
> give back less ground in the decline. On the group's second rally
> attempt, the cream of the crop rises to new-high ground faster than the
> other issues. In the vast majority of cases, a group's second advance
> will be narrower than the first, i.e. fewer stocks participating in the
> rise.
>
> The Internets are a classic example of this type of behavior. Primary,
> secondary, and tertiary 'Net-related issues paraded higher in the
> October-November advance. However, the Nov. 30 "reversal day" knocked
> the wind out of numerous secondary and tertiary Web names. As a result,
> Creative Computers, CyberCash, CyberShop International, Egghead.com,
> K-Tel International, MySoftware, Navarre, Onsale, Open Market, Preview
> Travel, theglobe.com, and 24/7 Media, among others, stand at or below
> their levels of three weeks ago.
>
> In the meantime, Amazon.com, America Online, and eBay each formed
> three-week bases. They then blasted into new-high ground, leaving their
> peers far behind.
>
> The point here is that the Internet player should realize that the
> current run in 'Net stocks is much narrower than the October-November
> surge. The market's weeding-out process, then, is placing a higher
> premium on individual stock selection. It's kind of like the cumulative
> NYSE advance-decline line turning down as the major stock averages begin
> a new advance: the probabilities of holding a winning stock have
> shifted.
>
> The general market
>
> Admittedly, the breadth of the stock market's advance has been paltry
> over the past six weeks. However, this doesn't concern me as it does
> others. It's too early to fret over the divergence between the
> cumulative NYSE advance-decline line and the Dow/S&P 500 indexes. If
> this was to continue for several months, it would be more of a worry.
>
> Ditto for trading volume, which has tapered for the last six weeks. It's
> constructive to see activity, or the level of the market's conviction,
> rise as the market advances.
>
> As I've said recently, there are two things that would turn me negative
> on the intermediate run that began Sept. 1: the major averages coming
> under distribution (professional selling) and the majority of the
> market's leaders breaking down in earnest.
>
> On this score, there has been some distribution of late in the Dow and
> Nasdaq.
>
> But this has been more than offset by the urgent accumulation in a heap
> of speculative growers with names such as Aware, Bebe Stores, Bel Fuse,
> CDW Computer Centers, Carrier Access, Clarify, Computer Network, Cree
> Research, eBay, Flextronics, Genesis Microchip, Geotel Communications,
> Global Crossing, Global Telesystems Group, Insight Enterprises,
> International Network Services, Macromedia, Metromedia Fiber Network,
> MindSpring Enterprises, Minimed, Network Appliance, Network Solutions,
> New Era of Networks, Pathogenesis, Power Integrations, Plexus, Priority
> Healthcare, QLogic, RF Micro Devices, Rambus, Resmed, and Transwitch.
>
> The outstanding tape action in these younger issues, as well as the
> strong accumulative behavior in senior technology shares such as Sun
> Microsystems (SUNW), International Business Machines (IBM), EMC (EMC),
> Texas Instruments (TXN), Cisco Systems (CSCO), Intel (INTC), Compaq
> Computer (CPQ), Oracle (ORCL), Nokia (NOK.A), Lucent Technologies (LU),
> and MCI WorldCom (WCOM), is enough for me to overlook the market's
> stingy breadth and volume figures.
>
> Cup-with-handle
>
> Meanwhile, the S&P 500 index is forming a bullish cup-with-handle
> formation. (see the article for the chart)
>
> This pattern, popularized by William O'Neil, is something I've spoken
> about in previous columns. A few stocks that have recently broken out of
> cup-with-handle patterns include FDX (FDX), General Electric (GE),
> Guidant (GDT), Infoseek (SEEK), Jabil Circuit (JBL), McDonald's (MCD),
> Medtronic (MDT), Nokia (NOK.A), and Sonic Automotive (SAH).
>
> The interest rate backdrop, as well as indicators of breadth, volume,
> and sentiment are important factors to consider when gauging the health
> of a market. But the manner in which stocks act, specifically the major
> averages and individual stock leaders, is where the rubber meets the
> road.
>
> And on this front, the advance that began Sept. 1 has yet to play out
> its hand.
----
adam@cs.caltech.edu
The Internet was designed to survive a nuclear war. But can it survive
capitalism?
-- Charles Petrie, IEEE Internet Computing, March/April 1997