Nasdaq's retreat: Breather? Yes. Correction? Maybe.

The Nasdaq composite is off to a rocky start in the first week of 2000
Written by Larry Barrett, Contributor

After jumping an unprecedented 86 percent in 1999, the Nasdaq composite is off to a rocky start in the first week of 2000. Down more than 400 points and counting, some market watchers are already calling this early slide the beginning of a correction.

As a rule, a drop of 10 percent or more from an all-time high by either the Dow Jones industrial average or Nasdaq composite has been defined as a correction. While the Nasdaq hasn't quite fallen 10 percent this week, the broad-based sell-off of leading tech stocks has already sounded some alarm bells.

However, leading market pundits believe it's a bit premature to call a short-term dip of 10 percent a correction in these wild trading times.

If the Nasdaq jumps more 30 percent in two months and gives back 10 percent is that such a bad deal? And most stocks did much better that the Nasdaq in those two months. These are volatile times. Get used to it.

Larry Wachtel, a market analyst at Prudential Securities, said the 10 percent benchmark is merely a definition-perhaps an outdated one -- that has very little significance to traders.

"A corrective phase is in the eye of the beholder," Wachtel said. "It's an artificial barrier. So what if the Dow or the Nasdaq is off 10 percent? It's all semantics."

Wachtel said that if anything the market's recent pullback should be viewed as a positive, a wake-up call that reminds investors that the huge gains they've become accustomed to can dry up just as quickly.

"The Nasdaq went up 86 percent last year after never going up more than 30 percent in any other year," Wachtel said. "To call that a bull market would be unfair. It's much more than a simple bull market. So if it falls 20 percent in over a period of time, does that make it a bear market? I don't think so."

It's an especially specious argument for the Nasdaq considering the overwhelming majority of its stocks are in the highly volatile technology sector.

"I don't think the 10 percent rule is appropriate for the technology stocks I follow," said Dan Scovel, an analyst at Fahnestock & Co. "People say a 10 percent drop signals a correction but the chip stocks I follow might be down as much as 25 percent in that same period. These stocks tend to be more intense whether they're going up or down."

Analysts also point out that today's market moves at such a lightning-fast pace, it's almost impossible to say when a market correction begins or ends.

Sure, a 10 percent plunge in one day might be an obvious correction, but if that same index gains back 20 or 25 percent in the following month, did a correction really happen?

It's an especially poignant question in the early stages of 2000 after the unbelievable gains made last year.

"Through 1999 we saw some excessive performance on the upside, and in 2000 it would not be surprising to see excesses on the downside," Alan Ackerman, a market strategist at Fahnestock told Reuters. "However, the US economy is in good shape."

While everyone agrees that a 20 percent pullback in the Dow signals the beginning of a bear market, even that argument loses some of its luster in light of recent stock performance.

"The last time the Dow lost 20 percent of its value was between June and October of 1998," Wachtel said. "Then it recovered and went up another 2,000 by year's end. It's hard to call that the beginning of a bear market."

Applying labels becomes even more complicated when targeting specific stocks or sectors. It's not uncommon for high flyers such as Oracle, Yahoo! or even Apple to gain or lose 10 percent of their value in a single trading day.

"Technology stocks have always been different," Scovel said. "We're still talking about percentages. Ten percent might be a good benchmark in general, but it's not as appropriate for today's technology stocks."

If you can't call an 86 percent explosion in the Nasdaq composite a "super" bull market, how can you call an 8 or 9 percent decline in a week a correction?

"It's an art form," Wachtel said. "You simply can't apply some definition to what's happening every year. The dynamics are changing too fast."

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