Closing Market Report

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Technology stalwarts
could lead next stock
market recovery

NEW YORK » Long cast in the role of Wall Street's leading sector, technology stocks are fulfilling that expectation again, recording a bigger advance over the past two weeks than other shares.

But tech's own leadership is changing. While smaller, more speculative stocks were at the forefront of 2003's rally, the leaders in the current market's upswing -- it's far too early to call it a rally from March's correction -- are the stalwart bellwethers.

These large, stable tech firms such as Hewlett-Packard Co., Dell Inc. and Microsoft Corp. weathered well when stocks fell in March and April and, according to market analysts, stand to post the biggest gains in the second half.

"As we get out of this correction, the second leg up of this bull market will be fueled by the larger tech companies," said Ken Tower, chief market strategist for Schwab's CyberTrader. "The interest in technology is still there, but it's an echo of the enthusiasm of the 1990s. Tech has become more evolutionary than revolutionary, and investors are using a much more considered approach."

With the economy continuing its robust growth, corporations have been setting aside more money for capital expenditures such as technology purchases. That bodes well for tech firms, which stand to see profits grow thanks to corporate spending on new workstations, servers, networks and software.

However, tech's former leaders, such as semiconductors and networking, are still too closely tied to the vagaries of the market. While they may indeed forecast Wall Street's ups and downs, they won't be the ones to lead an upside swing.

Semiconductors -- the microprocessors at the heart of every piece of computer hardware -- should enjoy the biggest gains coming off of their March and April lows. Worldwide chip sales have had double-digit growth each month since the beginning of 2004, and demand should keep those sales robust.

Those gains are coming, in part, because semiconductors were hit hardest in the recent market correction. And some of those second-half gains could already be priced into stock prices, analysts said.

Since topping off for the year at $32.04 per share on Jan. 12, Intel foretold the market's correction through February and March, bottoming out at $26.03 on April 20. Since then, Intel Corp. has risen 9.7 percent, closing yesterday at $28.55 per share. As the market continues to improve, analysts believe Intel and other chip stocks will continue to rise, but can still fall victim to the market's volatility.

"Semiconductors have risen to the top just recently because they got so beaten down earlier," said Richard A. Dickson, senior market strategist at Lowry's Research Reports. "They might be worth holding onto to make up for earlier losses, but they're still vulnerable."

Instead of the former leaders, a number of big-name tech stocks that have underperformed could lead future tech gains.

Computer makers and major software companies seem to have avoided much of the turbulence of 2004, signaling that they may show surprising stability and some positive gains in the future. Dell, for example, has traded between $31 and $37 a share for the past six months, but did not fall prey to the March correction as badly as other tech shares did. Indeed, the stock rose through much of March and April while other shares suffered.

Likewise, Hewlett-Packard is only $1 off its $22 price from six months ago. And software maker Microsoft has traded between $24 and $29 per share in the same time period.

"These stocks that have weathered the downturn well are in a great position," Tower said. "They're maturing as companies, they have solid fundamentals, and they can do pretty well."

However, the big-name companies, while leading the sector higher in the coming weeks and months, may be the only ones that can consistently perform well. As interest rates rise, investors may abandon smaller companies dependent on cheap capital for growth.

"We had a huge run-up last year, so what further growth are you going to see to justify even higher valuations in a lot of these companies?" Dickson said.

"You'll see a lot of individual stocks moving, but as a whole, you're not going to get a repeat of 2003, and there will be a big impetus to take profits where you can."

That means more volatility, and the tech sector will continue to reflect market sentiment as a whole -- a sharp dip in tech shares may well continue to forecast larger trends in the market.

The Dow Jones industrials ended the week up 221.71, or 2.2 percent, finishing at 10,188.45. The Standard & Poor's 500 index gained 27.12, or 2.5 percent, to close at 1,120.68.

The Nasdaq rose 74.65, or 3.9 percent, during the week, closing yesterday at 1,986.74.

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