Tech stocks which lead spring rally slip in favour of blue chips

Wall Street, no stranger to mood shifts, finds itself undergoing a big one this summer

Wall Street, no stranger to mood shifts, finds itself undergoing a big one this summer. Many of the high-flying technology stocks that led the spring market rally suddenly are out of favour.

What's in demand now are shares of old-line blue chip companies, especially in the industrial sector - names such as heavy-equipment maker Caterpillar and paper giant Georgia-Pacific.

Analysts say the turnabout in large part reflects increasing optimism that the economy is accelerating, which could translate into rising earnings for a host of businesses that traditionally do well in times of faster growth.

"This confirms that we're in an economic recovery," Mr John Bollinger, head of Bollinger Capital Management in Manhattan Beach, California, said of the rally in so-called cyclical stocks, whose fortunes rise and fall with the economy's cycles.

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Technology companies also stand to benefit from a stronger economy. But many of those shares had rocketed in spring to prices, relative to earnings, that began to remind some investors of the excesses of the last bull market.

The surge in longer-term interest rates in recent weeks has made highly-valued tech stocks seem even more expensively priced, analysts say. So some investors have been bailing out of those names.

The result has been a split market performance: The Dow Jones industrial average, which gained 64.64 points to 9,191.09 on Friday, is off just fractionally since July 14th, despite rising interest rates.

By contrast, the technology dominated Nasdaq composite index, which eased 8.15 points to 1,644.03 on Friday, has fallen 5.8 per cent since July 14.

Nasdaq lost ground on Friday despite fresh evidence that the economy is improving. The government reported that second-quarter worker productivity was double the first-quarter rate, which could bode well for continued gains in corporate earnings. Also, the Labor Department said new claims for unemployment benefits last week fell to the lowest level since February.

The sell-off in tech issues has dragged down such spring stars as Irvine, California.-based telecom chipmaker Broadcom, which has slumped 30 per cent from its recent high; many Internet-related names, including e-commerce company Chinadotcom, down 40 per cent from its peak; and software leader Oracle, down 17 per cent since mid-June.

On the flip side, Caterpillar has rallied 23 per cent since July 1st; chemical titan Dow Chemical. is up 10 per cent since then, and Georgia-Pacific also is up 10 per cent.

Mr Kevin Marder, chief strategist at money manager Ladenburg Thalmann Asset Management in Los Angeles, said he views the losses in many tech shares as part of a "very normal correction" within a still-bullish environment for the market overall.

"You had really tremendous moves in those stocks, and at some point you have to expect some kind of pullback," he said.

That doesn't mean tech stocks have peaked out, Mr Marder said. At the same time, the strength in industrial stocks is a healthy sign for investors who want to believe that the market's rally since mid-March isn't a flash in the pan, Mr Marder said.

The action in stocks such as Caterpillar, he said, "corroborates our view that the glass is half full when it comes to 2004 economic growth".

Towards the end of last week, many industrial, retail and energy shares led the broad market higher. On Thursday Caterpillar jumped $1.05 (€.92) to $67.16, Wal-Mart Stores gained $1.26 to $57 and ChevronTexaco. was up $1.38 to $72.26.

Winners topped losers by 20 to 12 on the New York Stock Exchange.

On Nasdaq, however, losers had a 16-to-15 edge. Among tech shares, QLogic rose $1.44 to $43.05 and Synopsys gained $1.12 to $61.71, but Yahoo lost 59 cents to $28.87 and United Online tumbled $2.35 to $31.45.

The Treasury auctioned $18-billion in 10-year notes at a yield of 4.37 per cent, amid strong demand. That completed the government's sale of $60 billion in new debt this week to finance the federal deficit.

The yield on the two-year T-note dropped to 1.71 per cent on Thursday from 1.75 per cent Wednesday and 1.82 per cent on Tuesday.