Momentum trading cuts both ways

The volatility in the first week of 2000 is a bit of an eye-opener
Written by Larry Dignan, Contributor

After a month of solid tech gains, investors last week learned momentum trading cuts both ways. But it's hard to feel sorry for those folks getting burned, especially those that didn't do their homework.

Even if you expected a correction, the volatility in the first week of 2000 is still a bit of an eye-opener. Momentum reversed quickly and a lot of folks were caught in the buzzsaw. Here's a look at some of last week's big momentum losers

Momentum loser 1: FreeMarkets. Buzzword used for big gains: B2B e-commerce.

FreeMarkets shocked investors Tuesday when it reported General Motors was taking its business to Commerce One. FreeMarkets plunged 19 percent on Tuesday, 12 percent Wednesday and slipped again on Thursday and Friday.

Folks got caught up in FreeMarkets stellar first day of trading and were hoping for more gains as underwriters started bullish coverage. But then GM split and ruined the fun. The ugly truth: the loss of GM should have been priced into shares because the risks were outlined in filings.

In regulatory filings, FreeMarkets said it depended on United Technologies and GM for most of its revenue. Both contracts can be terminated at any time, but United Technologies has to pay a termination fee. GM didn't have to pay a fee.

So why was this news that FreeMarkets would lose 10 percent of its revenue so shocking? Many of the investors in the stock never read the regulatory filings, never did their homework and never connected the dots between the November GM-Commerce One pact and FreeMarkets' potential to lose one of its largest customers.

The shareholders that were surprised by FreeMarkets' announcement were the same people that bought FMKT because business-to-business e-commerce stocks were hot.

Momentum loser 2: Qualcomm, ZDII's top performing stock for 1999. Buzzword leading to big gains: Wireless

Qualcomm could do no wrong because it's considered the wireless Microsoft. A 4-for-1 stock split and a lofty price target fueled shares up until the last day of 1999.

It's a different story now. Qualcomm closed slightly higher Monday and slipped throughout the week. Nothing has changed about the company, but there's a lot of profit taking going on. If you cash out now you have almost a 2,000 percent gain in a year and no tax bill for more than a year.

If you got in late, you're on the wrong side of the momentum game. The good news: Qualcomm rebounded a bit Friday. Happy times are here again?

Momentum loser 3: New Tel. Buzzword used for big gains: China.

Australian telecom firm New Tel soared as high as 313 percent Tuesday after revealing plans to offer Internet service in China, build a Chinese/English portal, and issue another 11 million shares along with 3 million options.

Shares were didn't trade Wednesday as Australian market officials and the Nasdaq probed the big gains. On Thursday, New Tel fell 33 percent and will probably come back to earth some more. On Friday the stock retreated another 16 percent.

Momentum loser 4: Salon.com. Buzzword used for big gains: Linux.

On Wednesday, Linux hype was used by Salon.com to get a big boost. You know the formula -- mention Linux in a press release and soar. Salon, a content company, is providing news to Red Hat in a deal that suddenly "weds two leaders in the open-source movement."

We knew Red Hat was an open source leader, but Salon? Salon got a little more mileage out of a distribution pact on Thursday, but it fell 11 percent Friday and could fall more.

One of the biggest dangers with momentum stocks is that they can become punch lines. Remember community sites like theglobe.com ? How about push technology? Whatever happened to those Y2K stocks? You get the idea.

"There's obviously a mix of people who trade on the market: Some people who trade off whatever's hot, and some people who trade on the longer term," said Larry Augustin, CEO of VA Linux, in an interview with ZDII. "One of things that concerns me about Linux right now is the effect of -- we call it the K-Tel effect: you announce that you're going to use Linux to run something, and your stock goes up.

"It's very important that you people help to filter out all those things that are real versus not real."

That's a big statement from a guy who became a paper billionaire in the largest one-day IPO run-up. It also shows that some of the biggest beneficiaries of market hype already know how it can burn you.

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